Bundling Information Goods: Pricing, Profits, and Efficiency
Management Science
Internet Publishing and beyond: The Economics of Digital Information and Intellectual Property
Internet Publishing and beyond: The Economics of Digital Information and Intellectual Property
Continuous-Time Airline Overbooking with Time-Dependent Fares and Refunds
Transportation Science
Research Note: Overselling with Opportunistic Cancellations
Marketing Science
Contingent Pricing to Reduce Price Risks
Marketing Science
Service Escape: Profiting from Customer Cancellations
Marketing Science
Consumption Flexibility, Product Configuration, and Market Competition
Marketing Science
Probabilistic Goods: A Creative Way of Selling Products and Services
Marketing Science
Firm-Created Word-of-Mouth Communication: Evidence from a Field Test
Marketing Science
Service Cancellation and Competitive Refund Policy
Marketing Science
Managing Consumer Returns in a Competitive Environment
Management Science
Group Buying: A New Mechanism for Selling Through Social Interactions
Management Science
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Although advance selling and probabilistic selling differ in both motivation and implementation, we argue that they share a common characteristic---both offer consumers a choice involving buyer uncertainty. We develop a formal model to examine the general economics of purchase options that involve buyer uncertainty, explore the differences in buyer uncertainty created via these two strategies, and derive conditions under which one dominates the other. We show that the seller can address unobservable buyer heterogeneity by inducing sales involving buyer uncertainty via two different mechanisms: (1) homogenizing heterogeneous consumers and (2) separating heterogeneous consumers. Offering advance sales encourages customers to purchase while they are uncertain about their consumption states (more homogeneous), but offering probabilistic goods encourages customers to reveal their heterogeneity via self-selecting whether or not to purchase the uncertain product. The relative attractiveness of these two selling strategies depends on the degree of two types of buyer heterogeneity: (1) Max_Value-Heterogeneity, which is the variation in consumers' valuations for their preferred good, and (2) Strength-Heterogeneity, which is the variation in the strength of consumers' preferences. Neither strategy is advantageous unless the market exhibits sufficient Max_Value-Heterogeneity. However, whereas Strength-Heterogeneity can destroy the profit advantage of advance selling, a mid-range of Strength-Heterogeneity is necessary for probabilistic selling to be advantageous.