Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell

Abstract

Advance selling occurs when sellers allow buyers to purchase at a time preceding consumption (Shugan and Xie 2000). Electronic tickets, smart cards, online prepayments, and other technological advances make advance selling possible for many, if not all, service providers. These technologies lower the cost of making complex transactions at a greater distance from the seller's site. They also give sellers more control over advance selling by decreasing arbitrage. As technology enhances the capability to advance sell, more academic attention is vital. This paper strives to exploit these technologies by developing advance-selling strategies.Until recently, advance-selling research focused on the airline industry and specific characteristics of that industry. These characteristics included the price insensitivity of late arrivals (e.g., business travelers) compared with early arrivals (e.g., leisure travelers), demand uncertainty across flights on the same day, and capacity constraints. Recent findings by Shugan and Xie (2000) show that advance selling is a far more general marketing tool than previously thought. It does not require these industry-specific characteristics. It only requires the existence of buyer uncertainty about future valuations. Moreover, sellers without the ability to price discriminate can use advance selling to improve profits to the level of first-degree price discrimination. This finding is important because buyers are nearly always uncertain about their future valuations for most services (e.g., the utility of next year's vacation or a future college education).In this paper, we take the next step from Shugan and Xie (2000). We show that advance-selling profits do not come from buyer surplus, but from more buyers being able to purchase. We determine when and how to advance sell in a variety of situations, including situations with limited capacity, second-period arrivals, refunds, buyer risk aversion, exogenous credibility, continuous preference distributions, and premium pricing. We determine when advance selling improves profits and, when it does, how to set advance prices. We ask and answer seven questions. First, when should sellers advance sell? Second, how much can advance selling improve profits compared with only spot selling? Third, what factors impact the profitability of advance selling and how? Fourth, should advance prices be higher or lower or the same as spot prices? Fifth, how do capacity constraints impact advance-selling strategies? Sixth, should sellers limit the number of advance sales? Finally, what is the possible impact of buyer risk aversion?First, we provide precise conditions when sellers should advance sell. For example, without capacity constraints, we show that sellers should advance sell when marginal costs are sufficiently low to make it profitable to sell to buyers with low valuations and sufficiently high to convince buyers that the spot price will be higher than the advance price.Second, we find that advance selling can almost double the profits fro...

Consumer Returns Policies and Supply Chain Performance

“…When consumers face valuation uncertainty, firms may wish to offer advance purchase discounts to compensate them for bearing risk (see Dana, 1998, andXie andShugan, 2001). Further, Gallego and Sahin (2006) show that selling call options on capacity can improve revenues over advance selling.…”

Information and Online Reviews

“…One of these is group buying, whereby consumers obtain a discount if they group and achieve a required group size (see Che and Gale, 1997; Anand and Aron, 2003; and Jing and Xie, 2011). Other marketing strategies are referral reward programs (see Biyalogorsky et al, 2001), one-to-one promotion (Shaffer and Zhang, 2002) and advance selling (Xie and Shugan, 2001), among others. These papers explore very interesting issues which are related to our basic idea.…”

Contracts, Biases, and Consumption of Access Services

“…The advance pricing and revenue management literature also suggests non-linear pricing solutions for one time use services such as event tickets and air transportation (Xie andShugan 2001, Gallego andSahin 2010). The fundamental assumption of all these papers is that consumers are rational decision makers who seek to maximize their surplus.…”