Optimal Early-Bird Discounts and the Challenges of Diversion

Abstract

Variable pricing and early-bird discounts can shift some demand or the time of purchase from higher-priced periods to lower-priced periods without increasing the total demand. This diversion effect influences optimal price levels, and the present paper presents a model for calculating optimal early-bird discounts when incorporating diversion. The model also reveals the differences in price elasticities and the feasible price interval for positive profit. The paper contributes to the literature on early-bird pricing strategies and offers practical insights for service providers seeking to optimize their pricing strategies. The empirical relevance is documented using survey and real-life experimental data among skiers at a major ski resort in Norway. The main insights of the paper are that the profit-maximizing discounts and the gap between the optimal price with and without diversion increase with the length of the pre-booking period.