Effect of Time Preferences on Optimal Prices and Profitability of Advance Selling

Abstract

In advance selling, firms announce that they will charge different prices for those who buy early vs. those who buy late. Previous literature showed that advance selling allows for increased profits in a rather wide range of settings, which typically hold in many service industries. Despite ample evidence that consumers exhibit higher discount rates than firms, it is not clear how differences in time preferences affect optimal prices of advance selling. This article develops an analytical model for optimal prices in advance selling that accounts for such differences in time preferences. In contrast to previous literature, the results indicate that advance selling quickly becomes less profitable than spot selling if consumers discount at a higher rate than firms (and vice versa). They also show that previous findings about the optimality of different advance selling strategies are unaffected if consumers and firms discount at the same rate, despite different optimal prices. Another major implication of our work is that analytical models and managerial decision making should consider time preferences if payment and consumption might occur at different points in time.