Pricing Capacity Over Time and Recourse Strategies: Facilitate Reselling, Offer Refunds/Options, or Overbook?

Abstract

Perishable capacity is often sold before it is used (e.g., tickets sold weeks before a sporting event) which creates the opportunity to include in the pricing mechanism a recourse strategy, i.e., allowing the firm or buyer to change ownership after an initial transaction. For example, a buyer could be allowed to resell the purchased unit to another buyer (e.g., a ticket exchange), or the firm could offer the option of a partial refund if the buyer prefers to relinquish it, or the firm could overbook, i.e., sell some of its capacity twice with some compensation to those denied service. Recourse mechanisms are controversial. For example, why should a firm allow its customers to profit from reselling the firm's good, especially if the “customer” is merely a speculator with no actual value for consuming it? We find that allowing such recourse can substantially increase the firm's profit because it allows the firm to ensure more of its capacity is sold and effectively enables the firm to sell that capacity at multiple prices. Among the recourse strategies, reselling is generally best. In fact, reselling is so effective that speculators play no role, and should not be a concern to the firm. We conclude that a firm selling capacity in advance should generally adopt some recourse strategy, and when feasible, reselling is particularly attractive.