Learning in Advance Selling with Heterogeneous Consumers

Abstract

Advance selling occurs when consumers order a firm's product prior to the regular selling season. It reduces uncertainty for both the firm and the buyers and enables the firm to better forecast its future demand. The distinctive feature of this paper is that there are both experienced and inexperienced consumers, with the former knowing their valuations of the product in advance. We show that pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced, experienced consumers

JEL Classification: D43, L13, C72