Resale or agency: pricing strategy for advance selling in a supply chain considering consumers’ loss aversion

Abstract

Abstract Advance selling activities are becoming more popular, especially in online retailing of new products. During the advance selling process, consumers may be loss averse. This influences the pricing strategy of the members of the supply chain. Using prospect theory and game theory, and considering consumers’ loss aversion, this paper studies the pricing strategy of advance selling in a supply chain consisting of a manufacturer and an e-retailer under a resale contract or an agency contract. The study finds that as consumers’ loss aversion increases, supply chain members set lower prices. Consumers’ loss aversion has a positive impact on the member who directly prices to consumers, but it has a negative impact on the indirect member. Advance selling under an agency contract makes it easier to achieve a Pareto improvement than that under the resale contract. When the unit order fulfilment cost is low, the e-retailer prefers the agency contract.