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Profiting from Demand Uncertainty: Pricing Strategies in Advance Selling

Xuying Zhao

University of Notre Dame

Zhan Pang

Lancaster University

June 18, 2011

Is demand uncertainty a devil? A conventional thought is that demand uncertainty hurts a seller's profit. However, we show that demand uncertainty could favor a seller if the pricing mechanism is designed properly. Specifically, we study the optimal pricing strategy in advance selling with both consumer demand and valuation uncertainties. Three strategies are considered and compared: dynamic pricing (DP), price commitment (PC), and pre-order price guarantee (PG). We show that consumer valuation and demand uncertainties in the advance selling period play important roles in determining the optimal pricing strategy. When pre-order demand uncertainty or consumer valuation uncertainty is high, a seller should use PG, which enables the seller to profit from demand uncertainty. Otherwise, PC is the optimal strategy. Furthermore, PG, while increasing a seller's profits, reduces consumer surplus, which may lead to a lower social welfare compared to the other two strategies.

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Date posted: June 19, 2011  

Suggested Citation

Zhao, Xuying and Pang, Zhan, Profiting from Demand Uncertainty: Pricing Strategies in Advance Selling (June 18, 2011). Available at SSRN: http://ssrn.com/abstract=1866765 or http://dx.doi.org/10.2139/ssrn.1866765

Contact Information

Xuying Zhao (Contact Author)
University of Notre Dame ( email )
Notre Dame, IN 46556-5646
United States
Zhan Pang
Lancaster University ( email )
Lancaster, LA1 4YX
United Kingdom
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