Price guarantee for advance selling in the presence of preorder-dependent social learning

Abstract

In this paper, we study the price guarantee policies of a seller practicing the advance selling strategy in the presence of preorder-dependent social learning. There are two types of consumers in the market. In the advance selling period, the high-type consumers arrive and make the preorder decision based on their valuation of the product. In the regular selling period, the low-type consumers arrive and make the purchase decision based on their valuation, which is a result of the preorder-dependent social learning. With a price guarantee policy the preorder consumers are compensated, fully or partially, for the difference between the advance selling price and the regular selling price. We model the seller and two types of consumers' sequential decision game within the framework of rational expectation. We investigate two price guarantee policies: 1) the full-price refund policy, in which the refund always covers the full price difference, and 2) the constant refund policy, in which the refund is a fixed constant. We show that, while the advance selling model with constant refund policy is always better or at least not worse than the base model without price guarantee, the model with full-price refund policy is better than the base model if and only if the high-type consumers' valuation exceeds a threshold. We find that the dominance relationship between the full-price refund policy and the constant refund policy is determined by the segment size of the high-type consumers and their valuation of the product. Through numerical study we find that such dominance relationship also depends on the high-type consumers' belief of the rational risk. Our findings provide important managerial insights for managers in the practice of advance selling.