Advance selling decisions with overconfident consumers

Abstract

Consumers may overestimate the precisions of their valuation predictions. In this paper, we propose a decision model of this overconfidence in valuation and analyze a retailer's advance selling strategy in a two-period setting. The presence of overconfident consumers yields new insights in the retailer's selling strategy. We find that advance selling strategy is not always beneficial to the retailer. The retailer should practice advance selling when the difference of the regular consumers' expected valuation and expected surplus when not buying in advance is no less than a certain threshold. This threshold is weakly decreasing in overconfidence level given the same risk aversion degree, strictly decreasing in consumers' risk aversion degree if overconfidence level is high, and strictly increasing otherwise. When consumers become either more overconfident or risk averse with a high overconfidence level, the retailer becomes more likely to sell in both periods. We also show that, the retailer will set a higher price in the advance selling period in the market with overconfident consumers than that without overconfident consumers when selling in both periods.