Advance booking discount strategies: Competition, information transparency and spot market

Abstract

We consider two competing risk-neutral firms (A and B) that can procure raw materials via a forward contract and in a volatile spot market. They produce seasonable products using perishable raw materials. The raw material spot price is affected by their trading behavior depending on the extent of the firms’ market powers. To attract consumers ordering products at a discount price in an advance selling period, Firm A offers an advance booking discount (ABD) strategy and updates the demand and spot price information from the pre-orders. The rival Firm B can either not obtain, partially obtain, or completely obtain pre-order information from Firm A, thereby resulting in information non-transparency, partial transparency, or full transparency, respectively. We initially examine the base case in which Firm A does not offer ABD. We then derive equilibrium solutions under the three cases of information transparency. We find that when the profit margin is high and firms have medium market powers, then Firm A should not offer ABD; otherwise, it should. With ABD, less transparency enables Firm A to set a higher price. Interestingly, the expected profit of Firm B, under certain circumstances, can be higher than in the base case even when Firm B cannot get any pre-order information. On the other hand, when firms have low market powers, partial transparency is profitable for Firm B; otherwise, full transparency is profitable.