Advance selling decisions with overconfident consumers

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July 2016, 12(3): 891-905. doi: 10.3934/jimo.2016.12.891

Advance selling decisions with overconfident consumers

Ying Li ^1, , Miyuan Shan ^1, and Michael Z.F. Li ^2,

1.	College of Business Administration, Hunan University, Changsha 410082, China, China
2.	Nanyang Business School, Nanyang Technological University, Nanyang Avenue, 639798, Singapore

Received August 2014 Revised April 2015 Published September 2015

Abstract
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Consumers may overestimate the precisions of their valuation predictions. In this paper, we propose a decision model of this overconfidence in valuation and analyze a retailer's advance selling strategy in a two-period setting. The presence of overconfident consumers yields new insights in the retailer's selling strategy. We find that advance selling strategy is not always beneficial to the retailer. The retailer should practice advance selling when the difference of the regular consumers' expected valuation and expected surplus when not buying in advance is no less than a certain threshold. This threshold is weakly decreasing in overconfidence level given the same risk aversion degree, strictly decreasing in consumers' risk aversion degree if overconfidence level is high, and strictly increasing otherwise. When consumers become either more overconfident or risk averse with a high overconfidence level, the retailer becomes more likely to sell in both periods. We also show that, the retailer will set a higher price in the advance selling period in the market with overconfident consumers than that without overconfident consumers when selling in both periods.

Keywords: consumer valuation, pricing, risk aversion., overconfidence, Advance selling.

Mathematics Subject Classification: Primary: 90B50, 91B06; Secondary: 91B4.

Citation: Ying Li, Miyuan Shan, Michael Z.F. Li. Advance selling decisions with overconfident consumers. Journal of Industrial and Management Optimization, 2016, 12 (3) : 891-905. doi: 10.3934/jimo.2016.12.891

References:

[1]	O. Bar-Gill and R. Stone, Pricing misperceptions: Explaining pricing structure in the cell phone service market, Journal of Empirical Legal Studies, 9 (2012), 430-456. doi: 10.1111/j.1740-1461.2012.01258.x.
[2]	W. L. Cooper, T. Homem-de-Mello and A. J. Kleywegt, Models of the spiral-down effect in revenue management, Operations Research, 54 (2006), 968-987. doi: 10.1287/opre.1060.0304.
[3]	W. L. Cooper and L. Li, On the use of buy up as a model of customer choice in revenue management, Production and Operations Management, 21 (2012), 833-850. doi: 10.1111/j.1937-5956.2012.01352.x.
[4]	D. C. Croson, R. Croson and Y. Ren, How to manage an overconfident newsvendor, 2008. Available from: http://www.researchgate.net/profile/ David_Croson/ publication/228434339_How_to_manage_an_overconfident_newsvendor/links/ 546284ef0cf2837efdaffc04.pdf.
[5]	F. Gino and G. Pisano, Toward a theory of behavioral operations, Manufacturing & Service Operations Management, 10 (2008), 676-691. doi: 10.1287/msom.1070.0205.
[6]	M. D. Grubb, Selling to overconfident consumers, American Economic Review, 99 (2009), 1770-1807.
[7]	U. Malmendier and G. Tate, CEO overconfidence and corporate investment, The Journal of Finance, 60 (2005), 2661-2700. doi: 10.1111/j.1540-6261.2005.00813.x.
[8]	D. A. Moore and P. J. Healy, The trouble with overconfidence, Psychological Review, 115 (2008), 502-517. doi: 10.1037/0033-295X.115.2.502.
[9]	Ö. Özer and Y. Zheng, Behavioral Issues in Pricing Management, in The Oxford Handbook of Pricing Management (eds. Ö. Özer and R. Phillips), Oxford University Press, 2011.
[10]	I. Popescu and Y. Wu, Dynamic pricing strategies with reference effects, Operations Research, 55 (2007), 413-429. doi: 10.1287/opre.1070.0393.
[11]	A. Prasad, K. E. Stecke and X. Zhao, Advance selling by a newsvendor retailer, Production and Operations Management, 20 (2011), 129-142.
[12]	Y. Ren, Biased Decisions: Three Essays on Decision Making, Ph.D thesis, University of Texas at Dallas, 2010.
[13]	Y. Ren and R. Croson, Overconfidence in newsvendor orders: An experimental study, Management Science, 59 (2013), 2502-2517. doi: 10.1287/mnsc.2013.1715.
[14]	E. Van den Steen, Overconfidence by Bayesian-rational agents, Management Science, 57 (2011), 884-896.
[15]	S. D. Vigna and U. Malmendier, Contract design and self-control: Theory and evidence, The Quarterly Journal of Economics, CXIX (2004), 353-402.
[16]	J. Xie and S. M. Shugan, Electronic tickets, smart cards, and online prepayments: When and how to advance sell, Marketing Science, 20 (2001), 219-243. doi: 10.1287/mksc.20.3.219.9765.
[17]	M. Yu, R. Kapuscinski and H. Ahn, Advance selling with interdependent customer valuations, 2011. Available from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042755.
[18]	T. R. Zenger, Why do employers only reward extreme performance? Examining the relationships among performance, pay, and turnover, Administrative Science Quarterly, 37 (1992), 198-219. doi: 10.2307/2393221.
[19]	X. Zhao and K. E. Stecke, Pre-orders for new to-be-released products considering consumer loss aversion, Production and Operations Management, 19 (2010), 198-215. doi: 10.1111/j.1937-5956.2009.01092.x.

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References:

[1]	O. Bar-Gill and R. Stone, Pricing misperceptions: Explaining pricing structure in the cell phone service market, Journal of Empirical Legal Studies, 9 (2012), 430-456. doi: 10.1111/j.1740-1461.2012.01258.x.
[2]	W. L. Cooper, T. Homem-de-Mello and A. J. Kleywegt, Models of the spiral-down effect in revenue management, Operations Research, 54 (2006), 968-987. doi: 10.1287/opre.1060.0304.
[3]	W. L. Cooper and L. Li, On the use of buy up as a model of customer choice in revenue management, Production and Operations Management, 21 (2012), 833-850. doi: 10.1111/j.1937-5956.2012.01352.x.
[4]	D. C. Croson, R. Croson and Y. Ren, How to manage an overconfident newsvendor, 2008. Available from: http://www.researchgate.net/profile/ David_Croson/ publication/228434339_How_to_manage_an_overconfident_newsvendor/links/ 546284ef0cf2837efdaffc04.pdf.
[5]	F. Gino and G. Pisano, Toward a theory of behavioral operations, Manufacturing & Service Operations Management, 10 (2008), 676-691. doi: 10.1287/msom.1070.0205.
[6]	M. D. Grubb, Selling to overconfident consumers, American Economic Review, 99 (2009), 1770-1807.
[7]	U. Malmendier and G. Tate, CEO overconfidence and corporate investment, The Journal of Finance, 60 (2005), 2661-2700. doi: 10.1111/j.1540-6261.2005.00813.x.
[8]	D. A. Moore and P. J. Healy, The trouble with overconfidence, Psychological Review, 115 (2008), 502-517. doi: 10.1037/0033-295X.115.2.502.
[9]	Ö. Özer and Y. Zheng, Behavioral Issues in Pricing Management, in The Oxford Handbook of Pricing Management (eds. Ö. Özer and R. Phillips), Oxford University Press, 2011.
[10]	I. Popescu and Y. Wu, Dynamic pricing strategies with reference effects, Operations Research, 55 (2007), 413-429. doi: 10.1287/opre.1070.0393.
[11]	A. Prasad, K. E. Stecke and X. Zhao, Advance selling by a newsvendor retailer, Production and Operations Management, 20 (2011), 129-142.
[12]	Y. Ren, Biased Decisions: Three Essays on Decision Making, Ph.D thesis, University of Texas at Dallas, 2010.
[13]	Y. Ren and R. Croson, Overconfidence in newsvendor orders: An experimental study, Management Science, 59 (2013), 2502-2517. doi: 10.1287/mnsc.2013.1715.
[14]	E. Van den Steen, Overconfidence by Bayesian-rational agents, Management Science, 57 (2011), 884-896.
[15]	S. D. Vigna and U. Malmendier, Contract design and self-control: Theory and evidence, The Quarterly Journal of Economics, CXIX (2004), 353-402.
[16]	J. Xie and S. M. Shugan, Electronic tickets, smart cards, and online prepayments: When and how to advance sell, Marketing Science, 20 (2001), 219-243. doi: 10.1287/mksc.20.3.219.9765.
[17]	M. Yu, R. Kapuscinski and H. Ahn, Advance selling with interdependent customer valuations, 2011. Available from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042755.
[18]	T. R. Zenger, Why do employers only reward extreme performance? Examining the relationships among performance, pay, and turnover, Administrative Science Quarterly, 37 (1992), 198-219. doi: 10.2307/2393221.
[19]	X. Zhao and K. E. Stecke, Pre-orders for new to-be-released products considering consumer loss aversion, Production and Operations Management, 19 (2010), 198-215. doi: 10.1111/j.1937-5956.2009.01092.x.

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