32 Pages Posted: 19 Jun 2011
Date Written: 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.
Suggested Citation: Suggested Citation
Zhao, Xuying and Pang, Zhan, Profiting from Demand Uncertainty: Pricing Strategies in Advance Selling (June 18, 2011). Available at SSRN: https://ssrn.com/abstract=1866765 or http://dx.doi.org/10.2139/ssrn.1866765