Advance-selling as a competitive marketing tool

Abstract

Advance selling before the time of consumption is now possible for even very small service providers, given new technologies (specifically, web-based transactions, biometrics and smart card technology). Moreover, recent research has revealed that advance selling can substantially improve profits without traditional price discrimination. However, that research was limited to monopoly settings. This paper explores the impact of competition on advance selling driven by consumer uncertainty about future consumption states (rather than price discrimination). We employ several different demand specifications to provide three major findings. First, unlike yield management (driven by price discrimination), the relative profit advantage from advance selling (driven by consumer uncertainty about future consumption states) in a competitive market can be higher or the same as that in a monopoly market. For every demand specification that we investigate, competition does not diminish the advantage of advance selling. The reason is that price discrimination leaves some groups (i.e., those being discriminated against) vulnerable to competitors (e.g., price discounts) and competition weakens discrimination. In contrast, consumer uncertainty applies to all consumers in the advance period so a competitor is unable to focus attention on only one group of consumers. However, in some demand specifications, the existence of competitors can limit the situations when an advance selling equilibrium exists because of the ability to unilaterally spot sell and damage profits of the seller who advance sells. Second, in some demand specifications, advance selling can create a win–win–win situation where the profits of two competitors increase while consumer surplus increases because advance selling allows greater market participation. Third, competition can strengthen the conditions under which advance selling is advantageous compared with spot selling. Hence, advance selling can be a very effective marketing tool in a competitive setting (albeit under more restrictive conditions than in a monopoly setting). It is a tool that can diminish competition and, unlike price discrimination, increase buyer surplus.