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doi: 10.3934/jimo.2020107

Quality choice and capacity rationing in advance selling

School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang, Jiangsu 212003, China

Received  September 2019 Revised  February 2020 Published  June 2020

Fund Project: The first author is supported by National Natural Science Foundation of China (NSFC) grants 71771106 and the second author is supported by Postgraduate Research & Practice Innovation Program of Jiangsu Province grants KYCX19_1649

This study considers a seller who sells a single product to strategic consumers sensitive to both price and quality over two periods: advance and spot. Customers' valuations are uncertain in the first period and revealed over time. The seller's decisions include whether to offer the product and, if so, the quality of the product, the prices in both periods, and whether to ration capacity in the advance period. The analysis is separated into two cases: unlimited capacity and limited capacity. The first case acts as a benchmark for the latter. It is found that in each case, the seller's decisions on product offering and quality choice are fully determined by a single parameter, namely the cost coefficient of quality. The optimal rationing policy and its determinants, however, are distinct in these different settings. And the optimal rationing policy is contingent on whether the high- or low-quality product is offered. Further, our numerical studies show that the seller can benefit from capacity rationing and flexibility on quality choice. Specifically, the value of rationing is not evident, whereas the value of flexibility on quality choice is considerably significant.

Citation: Taofeng Ye, Yan Zhao. Quality choice and capacity rationing in advance selling. Journal of Industrial & Management Optimization, doi: 10.3934/jimo.2020107
References:
[1]

E. Biyalogorsky and O. Koenigsberg, The design and introduction of product lines when consumer valuations are uncertain, Production and Operations Management, 23 (2014), 1539-1548.  doi: 10.1111/poms.12167.  Google Scholar

[2]

J. Chevalier and A. Goolsbee, Are durable goods consumers forward-looking? Evidence from college textbooks, Quarterly Journal of Economics, 124 (2009), 1853-1884.   Google Scholar

[3]

C. Chiu and T.-M. Choi, Supply chain risk analysis with mean-variance models: A technical review, Annals of Operations Research, 240 (2016), 489-507.  doi: 10.1007/s10479-013-1386-4.  Google Scholar

[4]

S.-H. Cho and C. S. Tang, Advance selling in a supply chain under uncertain supply and demand, Manufacturing & Service Operations Management, 15 (2013), 305-319.   Google Scholar

[5]

K.-L. HuangC.-W. Kuo and H.-J. Shih, Advance selling with freebies and limited production capacity, Omega, 73 (2017), 18-28.  doi: 10.1016/j.omega.2016.12.002.  Google Scholar

[6]

W. JinJ. Luo and Q. Zhang, Optimal ordering and financing decisions under advance selling and delayed payment for a capital-constrained supply chain, Journal of the Operational Research Society, 69 (2018), 1978-1993.  doi: 10.1080/01605682.2017.1415643.  Google Scholar

[7]

C. Li and F. Zhang, Advance demand information, price discrimination, and preorder strategies, Manufacturing & Service Operations Management, 15 (2013), 1-163.  doi: 10.1287/msom.1120.0398.  Google Scholar

[8]

J. LiN. Granados and S. Netessine, Are consumers strategic? Structural estimation from the air-travel industry, Management Science, 60 (2014), 2114-2137.   Google Scholar

[9]

M. Liu and E. Cao, Pricing strategies of a dual-channel supply chain with risk aversion, Transportation Research Part E, 90 (2016), 108-120.  doi: 10.1016/j.tre.2015.11.007.  Google Scholar

[10]

Q. Liu and D. Zhang, Dynamic pricing competition with strategic customers under vertical product differentiation, Management Science, 59 (2013), 84-101.  doi: 10.1287/mnsc.1120.1564.  Google Scholar

[11]

O. Loginova, Pricing strategies in advance selling: Should a retailer offer a pre-order price guarantee?, Review of Industrial Organization, 49 (2017), 465-489.  doi: 10.1007/s11151-016-9507-2.  Google Scholar

[12]

O. LoginovaX.H. Wang and C. Zeng, Learning in advance selling with heterogeneous consumers, Managerial and Decision Economics, 38 (2017), 765-783.   Google Scholar

[13]

S. MaG. LiS. P. Sethi and X. Zhao, Advance selling in the presence of market power and risk-averse consumers, Decision Sciences, 50 (2019), 142-169.  doi: 10.1111/deci.12318.  Google Scholar

[14]

V. MakA. RapoportE. J. Gisches and J. Han, Purchasing scarce products under dynamic pricing: An experimental investigation, Manufacturing & Service Operations Management, 16 (2014), 329-480.  doi: 10.1287/msom.2014.0480.  Google Scholar

[15]

K. S. Moorthy and I. P. L. Png, Market segmentation, cannibalization, and the timing of product introductions, Management Science, 38 (1992), 307-458.  doi: 10.1287/mnsc.38.3.345.  Google Scholar

[16]

H. Nair, Intertemporal price discrimination with forward-looking consumers: Application to the US market for console vedio-games, Quantitative Marketing and Economics, 5 (2007), 239-292.   Google Scholar

[17]

T. NoparumpaB. Kazaz and S. Webster, Wine futures and advance selling under quality uncertainty, Manufacturing & Service Operations Management, 17 (2015), 273-426.  doi: 10.1287/msom.2015.0529.  Google Scholar

[18]

N. Osadchiy and G. Vulcano, Selling with binding reservations in the presence of strategic consumers, Management Science, 56 (2010), 2173-2190.  doi: 10.1287/mnsc.1100.1245.  Google Scholar

[19]

A. K. Parlaktürk, The value of product variety when selling to strategic consumers, Manufacturing & Service Operations Management, 14 (2012), 371-385.   Google Scholar

[20]

A. PrasadK. E. Stecke and X. Zhao, Advance selling by a newsvendor retailer, Production and Operations Management, 20 (2011), 129-142.   Google Scholar

[21]

B.-D. Rhee, Consumer heterogeneity and strategic quality decisions, Management Science, 42 (1996), 157-306.  doi: 10.1287/mnsc.42.2.157.  Google Scholar

[22]

M. M. H. ŞerefO. ŞerefA. Alptekinoǧlu and S. S. Erengüç, Advance selling to strategic consumers, Computational Management Science, 13 (2016), 597-626.  doi: 10.1007/s10287-016-0264-3.  Google Scholar

[23]

G. P. Soysal and L. Krishnamurthi, Demand dynamics in the seasonal goods industry: An empirical analysis, Marketing Science, 31 (2012), 195-368.  doi: 10.1287/mksc.1110.0693.  Google Scholar

[24]

H. ShiY. Liu and N. C. Petruzzi, Consumer heterogeneity, product quality, and distribution channels, Management Science, 59 (2013), 1162-1176.  doi: 10.1287/mnsc.1120.1604.  Google Scholar

[25]

R. Swinney, Selling to strategic consumers when product value is uncertain: The value of matching supply and demand, Management Science, 57 (2011), 1737-1751.   Google Scholar

[26]

J. WuS. WangX. ChaoC. T. Ng and T. C. E. Cheng, Impact of risk aversion on optimal decisions in supply contracts, International Journal of Production Economics, 128 (2010), 569-576.   Google Scholar

[27]

J. Xie and S. M. Shugan, Electronic tickets, smart cards, and online prepayments: When and how to advance sell, Marketing Science, 20 (2001), 219-327.  doi: 10.1287/mksc.20.3.219.9765.  Google Scholar

[28]

M. YuH.-S. Ahn and R. Kapuscinski, Rationing capacity in advance selling to signal quality, Management Science, 61 (2015), 560-577.   Google Scholar

[29]

M. YuR. Kapuscinski and H.-S. Ahn, Advance selling: Effects of interdependent consumer valuations and seller's capacity, Management Science, 61 (2015), 2100-2117.  doi: 10.1287/mnsc.2014.2047.  Google Scholar

[30]

M. YuL. Debo and R. Kapuscinski, Strategic waiting for consumer-generated quality information: Dynamic pricing of new experience goods, Management Science, 62 (2016), 410-435.   Google Scholar

[31]

X. ZhaoZ. Pang and K. E. Stecke, When does a retailer's advance selling capability benefit manufacturer, retailer, or both?, Production and Operations Management, 25 (2016), 1073-1087.  doi: 10.1111/poms.12535.  Google Scholar

show all references

References:
[1]

E. Biyalogorsky and O. Koenigsberg, The design and introduction of product lines when consumer valuations are uncertain, Production and Operations Management, 23 (2014), 1539-1548.  doi: 10.1111/poms.12167.  Google Scholar

[2]

J. Chevalier and A. Goolsbee, Are durable goods consumers forward-looking? Evidence from college textbooks, Quarterly Journal of Economics, 124 (2009), 1853-1884.   Google Scholar

[3]

C. Chiu and T.-M. Choi, Supply chain risk analysis with mean-variance models: A technical review, Annals of Operations Research, 240 (2016), 489-507.  doi: 10.1007/s10479-013-1386-4.  Google Scholar

[4]

S.-H. Cho and C. S. Tang, Advance selling in a supply chain under uncertain supply and demand, Manufacturing & Service Operations Management, 15 (2013), 305-319.   Google Scholar

[5]

K.-L. HuangC.-W. Kuo and H.-J. Shih, Advance selling with freebies and limited production capacity, Omega, 73 (2017), 18-28.  doi: 10.1016/j.omega.2016.12.002.  Google Scholar

[6]

W. JinJ. Luo and Q. Zhang, Optimal ordering and financing decisions under advance selling and delayed payment for a capital-constrained supply chain, Journal of the Operational Research Society, 69 (2018), 1978-1993.  doi: 10.1080/01605682.2017.1415643.  Google Scholar

[7]

C. Li and F. Zhang, Advance demand information, price discrimination, and preorder strategies, Manufacturing & Service Operations Management, 15 (2013), 1-163.  doi: 10.1287/msom.1120.0398.  Google Scholar

[8]

J. LiN. Granados and S. Netessine, Are consumers strategic? Structural estimation from the air-travel industry, Management Science, 60 (2014), 2114-2137.   Google Scholar

[9]

M. Liu and E. Cao, Pricing strategies of a dual-channel supply chain with risk aversion, Transportation Research Part E, 90 (2016), 108-120.  doi: 10.1016/j.tre.2015.11.007.  Google Scholar

[10]

Q. Liu and D. Zhang, Dynamic pricing competition with strategic customers under vertical product differentiation, Management Science, 59 (2013), 84-101.  doi: 10.1287/mnsc.1120.1564.  Google Scholar

[11]

O. Loginova, Pricing strategies in advance selling: Should a retailer offer a pre-order price guarantee?, Review of Industrial Organization, 49 (2017), 465-489.  doi: 10.1007/s11151-016-9507-2.  Google Scholar

[12]

O. LoginovaX.H. Wang and C. Zeng, Learning in advance selling with heterogeneous consumers, Managerial and Decision Economics, 38 (2017), 765-783.   Google Scholar

[13]

S. MaG. LiS. P. Sethi and X. Zhao, Advance selling in the presence of market power and risk-averse consumers, Decision Sciences, 50 (2019), 142-169.  doi: 10.1111/deci.12318.  Google Scholar

[14]

V. MakA. RapoportE. J. Gisches and J. Han, Purchasing scarce products under dynamic pricing: An experimental investigation, Manufacturing & Service Operations Management, 16 (2014), 329-480.  doi: 10.1287/msom.2014.0480.  Google Scholar

[15]

K. S. Moorthy and I. P. L. Png, Market segmentation, cannibalization, and the timing of product introductions, Management Science, 38 (1992), 307-458.  doi: 10.1287/mnsc.38.3.345.  Google Scholar

[16]

H. Nair, Intertemporal price discrimination with forward-looking consumers: Application to the US market for console vedio-games, Quantitative Marketing and Economics, 5 (2007), 239-292.   Google Scholar

[17]

T. NoparumpaB. Kazaz and S. Webster, Wine futures and advance selling under quality uncertainty, Manufacturing & Service Operations Management, 17 (2015), 273-426.  doi: 10.1287/msom.2015.0529.  Google Scholar

[18]

N. Osadchiy and G. Vulcano, Selling with binding reservations in the presence of strategic consumers, Management Science, 56 (2010), 2173-2190.  doi: 10.1287/mnsc.1100.1245.  Google Scholar

[19]

A. K. Parlaktürk, The value of product variety when selling to strategic consumers, Manufacturing & Service Operations Management, 14 (2012), 371-385.   Google Scholar

[20]

A. PrasadK. E. Stecke and X. Zhao, Advance selling by a newsvendor retailer, Production and Operations Management, 20 (2011), 129-142.   Google Scholar

[21]

B.-D. Rhee, Consumer heterogeneity and strategic quality decisions, Management Science, 42 (1996), 157-306.  doi: 10.1287/mnsc.42.2.157.  Google Scholar

[22]

M. M. H. ŞerefO. ŞerefA. Alptekinoǧlu and S. S. Erengüç, Advance selling to strategic consumers, Computational Management Science, 13 (2016), 597-626.  doi: 10.1007/s10287-016-0264-3.  Google Scholar

[23]

G. P. Soysal and L. Krishnamurthi, Demand dynamics in the seasonal goods industry: An empirical analysis, Marketing Science, 31 (2012), 195-368.  doi: 10.1287/mksc.1110.0693.  Google Scholar

[24]

H. ShiY. Liu and N. C. Petruzzi, Consumer heterogeneity, product quality, and distribution channels, Management Science, 59 (2013), 1162-1176.  doi: 10.1287/mnsc.1120.1604.  Google Scholar

[25]

R. Swinney, Selling to strategic consumers when product value is uncertain: The value of matching supply and demand, Management Science, 57 (2011), 1737-1751.   Google Scholar

[26]

J. WuS. WangX. ChaoC. T. Ng and T. C. E. Cheng, Impact of risk aversion on optimal decisions in supply contracts, International Journal of Production Economics, 128 (2010), 569-576.   Google Scholar

[27]

J. Xie and S. M. Shugan, Electronic tickets, smart cards, and online prepayments: When and how to advance sell, Marketing Science, 20 (2001), 219-327.  doi: 10.1287/mksc.20.3.219.9765.  Google Scholar

[28]

M. YuH.-S. Ahn and R. Kapuscinski, Rationing capacity in advance selling to signal quality, Management Science, 61 (2015), 560-577.   Google Scholar

[29]

M. YuR. Kapuscinski and H.-S. Ahn, Advance selling: Effects of interdependent consumer valuations and seller's capacity, Management Science, 61 (2015), 2100-2117.  doi: 10.1287/mnsc.2014.2047.  Google Scholar

[30]

M. YuL. Debo and R. Kapuscinski, Strategic waiting for consumer-generated quality information: Dynamic pricing of new experience goods, Management Science, 62 (2016), 410-435.   Google Scholar

[31]

X. ZhaoZ. Pang and K. E. Stecke, When does a retailer's advance selling capability benefit manufacturer, retailer, or both?, Production and Operations Management, 25 (2016), 1073-1087.  doi: 10.1111/poms.12535.  Google Scholar

Figure 1.  Sequence of events
Figure 2.  Value of rationing
Figure 3.  Value of flexibility on quality choice
Figure 4.  Value of flexibility on quality choice when capacity rationing is prohibited
Figure A1.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ T\leq\frac{N}{3} $
Figure A2.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{3}<T\leq\frac{N}{2} $ and $ N_{1}\leq\frac{3T-N}{2} $
Figure A3.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{3}<T\leq\frac{N}{2} $ and $ \frac{3T-N}{2}<N_{1}\leq\overline{N}_{1} $
Figure A4.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{3}<T\leq\frac{N}{2} $ and $ N_{1}>\overline{N}_{1} $
Figure A5.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{2}<T\leq\overline{T} $ and $ N_{1}\leq\frac{3T-N}{2} $
Figure A6.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{2}<T\leq\overline{T} $ and $ \frac{3T-N}{2}<N_{1}\leq\overline{N}_{1} $
Figure A7.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ \frac{N}{2}<T\leq\overline{T} $ and $ N_{1}>\overline{N}_{1} $
Figure A8.  Sketch of $ \Pi_{q}^{C}(S_{q}) $ for $ T>\overline{T} $
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