Probabilistic Goods: A Creative Way of Selling Products and Services

Abstract:     
This paper defines a unique type of product or service offering, termed probabilistic goods, and analyzes a novel selling strategy, termed probabilistic selling (PS). A probabilistic good is not a concrete product or service but an offer involving a probability of getting any one of a set of multiple distinct items. Under the probabilistic selling strategy, a multi-item seller creates probabilistic goods using the existing distinct products or services and offers such probabilistic goods as additional purchase choices. The probabilistic selling strategy allows sellers to benefit from introducing a new type of buyer uncertainty, i.e., uncertainty in product assignments. First, introducing such uncertainty enables sellers to create a “virtual” product or service (i.e., probabilistic good), which opens up a creative way to segment a market. We find that the probabilistic selling strategy is a general marketing tool that has the potential to benefit sellers in many different industries. Second, this paper shows that creating buyer uncertainty in product assignments is a new way for sellers to deal with their own market uncertainty. We illustrate two such benefits: (a) offering probabilistic goods can reduce the seller’s information disadvantage and lessen the negative effect of demand uncertainty on profit, and (b) offering probabilistic goods can solve the mismatch between capacity and demand and enhance efficiency. Emerging technology is creating exciting (previously unfeasible) opportunities to implement PS and to obtain these many advantages.

Keywords: probabilistic selling, probabilistic goods, opaque goods; pricing, product differentiation, e-commerce, yield management, inventory management, product line, price discrimination

JEL Classification: M31, L12

Accepted Paper Series