Advance selling to strategic consumers

Abstract

Advance selling of goods and services is a form of separating purchase from consumption. It is often employed when consumers are uncertain about their consumption utilities until a short time period before consumption. A book to be released, a concert to attend, or a cruise to take are some examples. Invariably, in consumers’ mind inventory availability (of copies, seats, or rooms) is a concern. In this paper we study a retailer’s inventory and pricing decisions in an advance selling scenario that involves consumers who are strategic. Some consumers not only consider advance and spot prices, but also the uncertainty in future availability of the product (during the spot period) and in their consumption utility from it. We characterize the optimal inventory management and pricing policies, and discuss several interesting aspects of the solution. For example, it can be optimal for the retailer to limit advance sales even if there is more demand for it, and it can be optimal for the retailer to limit its inventory even though there is more capacity to keep it, but not both.