Advance Selling to Strategic Consumers: Preorder Contingent Production Strategy with Advance Selling Target

Abstract

Motivated by emerging industry practices, this paper studies the effectiveness of a new advance selling strategy in counteracting strategic consumer behavior: the preorder contingent production (PCP) strategy, where the seller's production decision is contingent on an advance selling target. We find that compared to other advance selling strategies, such as the traditional advance selling strategy and the capacity rationing strategy, the PCP strategy is effective in mitigating strategic waiting behavior and thus can significantly improve the seller's profit performance, especially when consumers’ discount factor is at a medium or high level, the production cost is not too high, or the market size has an unbalanced probability distribution. Moreover, when the market size is deterministic, we show that the PCP strategy can completely eliminate strategic waiting behavior and attain the seller's profit performance under myopic consumer behavior. Finally, we demonstrate that the benefits of the PCP strategy are robust under other model considerations.