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Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?

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  • Oksana Loginova

    (University of Missouri)

Abstract

I consider a retailer who sells a new product over two periods: advance and regular selling seasons. Experienced consumers learn their valuations for the product in the advance selling season, while inexperienced consumers learn only when the product becomes available in the regular selling season. The retailer is uncertain about the number of inexperienced consumers. Production takes place between the periods. Unsold units are scrapped at a price that is below the retailer’s marginal cost, which makes it costly to produce and not sell. I show that when consumers are less heterogeneous in their valuations, the retailer should implement advance selling and offer a pre-order price guarantee. For some parameter configurations a pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the seller to react to the information that is obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations, the market size uncertainty is small, or the scrap value is high, the retailer should not implement advance selling.

Suggested Citation

  • Oksana Loginova, 2016. "Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(3), pages 465-489, November.
    • Handle: RePEc:kap:revind:v:49:y:2016:i:3:d:10.1007_s11151-016-9507-2
    DOI: 10.1007/s11151-016-9507-2
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    References listed on IDEAS

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    Cited by:

    1. Junshan Lin & Chenhang Zeng, 2023. "Pre-order strategies with demand uncertainty and consumer heterogeneity," The Japanese Economic Review, Springer, vol. 74(1), pages 83-115, January.
    2. Marco Sahm, 2020. "Advance-Purchase Financing of Projects with Few Buyers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 909-933, December.
    3. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.
    4. Peng, Weicai & Tian, Zhongjun & Wang, Yefeng, 2020. "Price guarantee for advance selling in the presence of preorder-dependent social learning," International Journal of Production Economics, Elsevier, vol. 219(C), pages 115-122.
    5. Jun, Sung Youl & Kim, Kyung Ho & Park, Hye Kyung, 2019. "The effect of the preorder strategy on consumers' product choice: The moderating role of product experience and payment timing," Journal of Business Research, Elsevier, vol. 99(C), pages 80-86.

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    More about this item

    Keywords

    Advance selling; Demand uncertainty; Learning; Price guarantee; Price commitment; The Newsvendor problem;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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