Advance Selling by a Newsvendor Retailer

30 Pages Posted: 9 Apr 2009

See all articles by Ashutosh Prasad

Ashutosh Prasad

University of California, Riverside (UCR)

Kathryn E. Stecke

University of Texas at Dallas - Naveen Jindal School of Management

Xuying Zhao

Texas A&M University - Mays Business School; University of Notre Dame

Date Written: February 24, 2009

Abstract

Retailers often face a newsvendor problem, i.e., they must order their inventory prior to a short selling period with uncertain demand. The uncertainty can be reduced by advance selling because not only are advance orders certain, but the remaining demand can be better forecasted. Consumers, however, may prefer not to purchase in advance unless given a discount because they are uncertain about their valuation for the product in advance. It is then unclear whether advance selling to pass some uncertainty risk to consumers is optimal for the retailer.

This paper examines the advance selling price and inventory decisions in a two-period setting, where the first period is the advance selling period and the second is the selling (and consumption) period. We find that the advance selling strategy is not always optimal, but is contingent on parameters of the market (e.g., market potential, uncertainty), the consumers (e.g., valuation, risk aversion and heterogeneity). For example, we find that retailers should sell in advance if the consumers' expected valuation exceeds consumers' expected surplus when not buying early by a certain threshold at least, and that this threshold increases with risk aversion but decreases with stockout risks.

Keywords: Advance selling, Newsvendor, Consumer valuation, Uncertainty, Pricing

Suggested Citation

Prasad, Ashutosh and Stecke, Kathryn E. and Zhao, Xuying, Advance Selling by a Newsvendor Retailer (February 24, 2009). Available at SSRN: https://ssrn.com/abstract=1375222 or http://dx.doi.org/10.2139/ssrn.1375222

Ashutosh Prasad

University of California, Riverside (UCR)

900 University Avenue
Riverside, CA CA 92521
United States

Kathryn E. Stecke

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Xuying Zhao (Contact Author)

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States