Tuesday, November 8, 2011
Posted by D. Daniel Sokol
Oksana Loginova (Department of Economics, University of Missouri-Columbia), X. Henry Wang (Department of Economics, University of Missouri-Columbia) and Chenhang Zeng discuss Advance Selling in the Presence of Experienced Consumers.
ABSTRACT: The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present theoretical study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may or may not be at a discount to the regular selling price.