The Economics of Buyer Uncertainty: Advance Selling vs. Probabilistic Selling

35 Pages Posted: 15 Sep 2009

See all articles by Scott Fay

Scott Fay

Syracuse University

Jinhong Xie

University of Florida - Warrington College of Business Administration

Date Written: September 12, 2009

Abstract

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, while Strength-Heterogeneity can destroy the profit advantage of Advance Selling, a mid-range of Strength-Heterogeneity is necessary for Probabilistic Selling to be advantageous.

Keywords: advance selling, probabilistic selling, demand uncertainty, consumer heterogeneity, pricing

JEL Classification: M31, D42, D8

Suggested Citation

Fay, Scott and Xie, Jinhong, The Economics of Buyer Uncertainty: Advance Selling vs. Probabilistic Selling (September 12, 2009). Available at SSRN: https://ssrn.com/abstract=1472496 or http://dx.doi.org/10.2139/ssrn.1472496

Scott Fay (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States
315-443-3456 (Phone)

HOME PAGE: http://whitman.syr.edu/Directory/ShowInfo.aspx?id=360

Jinhong Xie

University of Florida - Warrington College of Business Administration ( email )

209 Bryan Hall Campus Box 117155
Gainesville, FL 32611-7166
United States
352-392-0161 Ext. 1233 (Phone)
352-846-0457 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/xie/Xie_DirectoryProfile.htm

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