Marketing Papers

Document Type

Technical Report

Date of this Version

2017

Publication Source

Marketing Science

Volume

36

Issue

2

Start Page

214

Last Page

231

DOI

10.1287/mksc.2016.1006

Abstract

It has been shown that a monopolist can use advance selling to increase profits. This paper documents that this may not hold when a firm faces competition. With advance selling a firm offers its service in an advance period, before consumers know their valuations for the firms’ services, or later on in a spot period, when consumers know their valuations. We identify two ways in which competition limits the effectiveness of advance selling. First, while a monopolist can sell to consumers with homogeneous preferences at a high price, this homogeneity intensifies price competition, which lowers profits. However, the firms may nevertheless find themselves in an equilibrium with advance selling. In this sense, advance selling is better described as a competitive necessity rather than as an advantageous tool to raise profits. Second, competition in the spot period is likely to lower spot period prices, thereby forcing firms to lower advance period prices, which is also not favorable to profits. Rational firms anticipate this and curtail or eliminate the use of advance selling. Thus, even though a monopolist fully exploits the practice of advance selling, rational firms facing competition either mitigate it or avoid it completely.

Copyright/Permission Statement

Originally published in Marketing Science © 2017 INFORMS

This is a pre-publication version. The final version is available at http://dx.doi.org/10.1287/mksc.2016.1006

Keywords

consumer behavior, game theory, pricing, competitive analysis

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Date Posted: 15 June 2018

This document has been peer reviewed.