Advance Selling and Advertising: A Newsvendor Framework

Meng Wu, Stuart X. Zhu*, Ruud H. Teunter

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Scopus)
13 Downloads (Pure)

Abstract

Many firms offer consumers the opportunity to place advance orders at a discount when introducing a new product to the market. Doing so has two main advantages. First, it can increase total expected sales by exploiting valuation uncertainty of the consumers at the advance ordering stage. Second, total sales can be estimated more accurately based on the observed advance orders, reducing the need for safety stock and thereby obsolescence cost. In this research, we derive new insights into trading off these benefits against the loss in revenue from selling at a discount at the advance stage. In particular, we are the first to explore whether firms should advertise the advance ordering opportunity. We obtain several structural insights into the optimal policy, which we show is driven by two dimensions: the fraction of consumers who potentially buy in advance (i.e., strategic consumers) and the size of the discount needed to make them buy in advance. If the discount is below some threshold, then firms should sell in advance and they should advertise that option if the fraction of strategic consumers is sufficiently large. If the discount is above the threshold, then firms should not advertise and only sell in advance if the fraction of strategic consumers is sufficiently small. Graphical displays based on the two dimensions provide further insights.
Original languageEnglish
Pages (from-to)182-215
Number of pages34
JournalDecision Sciences
Volume52
Issue number1
Early online date10-Jan-2020
DOIs
Publication statusPublished - Feb-2021

Keywords

  • Advance Selling
  • Advertising
  • Demand Forecast Accuracy Improvement
  • Newsvendor
  • Strategic Consumer
  • BOOKING DISCOUNT PROGRAMS
  • CONSUMERS
  • PRODUCTS
  • FUTURE
  • DECISIONS
  • SALES
  • MODEL

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