Advance Selling in the Presence of Market Power and Risk‐Averse Consumers

Abstract

ABSTRACTWe consider a manufacturer who procures raw material through a long‐term contract as well as in a spot market to produce goods for selling to consumers, a fraction of whom are risk averse. We assume that the manufacturer has the market power to influence the spot market price of raw material. To increase consumer demand and obtain demand information, the manufacturer may implement an advance selling program that depends on his market power and consumer risk aversion. We investigate whether the manufacturer should offer the advance selling program and how his decision and performance are influenced by the program. We find that the advance selling program should be offered when consumer risk aversion is low, or when it is high, and the manufacturer has high and low market power. By contrast, the advance selling program should not be offered when consumer risk aversion is high and the market power is medium. Our results also reveal that even with no promotion cost of the advance selling program, the manufacturer may not always offer it. Finally, the manufacturer benefits more from advance selling when consumers are myopic and/or risk neutral.