Quality choice and capacity rationing in advance selling

Abstract

<p style='text-indent:20px;'>This study considers a seller who sells a single product to strategic consumers sensitive to both price and quality over two periods: advance and spot. Customers' valuations are uncertain in the first period and revealed over time. The seller's decisions include whether to offer the product and, if so, the quality of the product, the prices in both periods, and whether to ration capacity in the advance period. The analysis is separated into two cases: unlimited capacity and limited capacity. The first case acts as a benchmark for the latter. It is found that in each case, the seller's decisions on product offering and quality choice are fully determined by a single parameter, namely the cost coefficient of quality. The optimal rationing policy and its determinants, however, are distinct in these different settings. And the optimal rationing policy is contingent on whether the high- or low-quality product is offered. Further, our numerical studies show that the seller can benefit from capacity rationing and flexibility on quality choice. Specifically, the value of rationing is not evident, whereas the value of flexibility on quality choice is considerably significant.</p>