Advance Selling by a Newsvendor Retailer

Abstract

Retailers often face a newsvendor problem, i.e., they must order their inventory prior to a short selling period with uncertain demand. The uncertainty can be reduced by advance selling because not only are advance orders certain, but the remaining demand can be better forecasted. Consumers, however, may prefer not to purchase in advance unless given a discount because they are uncertain about their valuation for the product in advance. It is then unclear whether advance selling to pass some uncertainty risk to consumers is optimal for the retailer.This paper examines the advance selling price and inventory decisions in a two-period setting, where the first period is the advance selling period and the second is the selling (and consumption) period. We find that the advance selling strategy is not always optimal, but is contingent on parameters of the market (e.g., market potential, uncertainty), the consumers (e.g., valuation, risk aversion and heterogeneity). For example, we find that retailers should sell in advance if the consumers' expected valuation exceeds consumers' expected surplus when not buying early by a certain threshold at least, and that this threshold increases with risk aversion but decreases with stockout risks.