Advance selling policies with stochastic consumer valuations and advertising effects: dynamic pricing and inventory decisions

Abstract

Advance selling enables consumers to order new products before their release, ensuring prompt deliveries upon release. Retailers benefit from advance selling by boosting total sales and mitigating excess or insufficient inventory costs. In practice, various advance selling policies are designed and applied. Standard Advance Selling, Advance Selling with Price Guarantee, and Advance Selling with a Deposit are often seen and successfully implemented policies by different retailers. However, given the stochastic demands and consumer valuations, whether advance selling is always desirable for retailers is unclear. If advance selling is beneficial, what are the optimal prices and ordering quantities and which policy is the best remain interesting questions. This paper aims to provide analytical solutions for optimal pricing and inventory decisions under the three advance selling policies mentioned above. The results show that the performance of the advance selling policies relies on the proportion of high-valuation consumers. The critical values of the proportion of high-valuation consumers are identified. Further, we extend the problem to consider the effects of advertising. The advertising affects the information diffusion and indirectly affects the demands of the product. Moreover, the analytical and numerical study compares the performances of different advance selling policies. Finally, multiple managerial insights are summarized.