Is Advance Selling Desirable with Competition?

Abstract

It has been shown that a monopolist can use advance selling to increase profits. This paper documents that this may not hold when firms face competition. With advance selling a firm offers its service in an advance period, before consumers know their valuations for the firms' services, or later on in a spot period, when consumers know their valuations. We identify two ways in which competition limits the effectiveness of advance selling. First, while a monopolist can sell to homogeneous consumers at a high price, if consumers are equally uncertain as to which firm they prefer, their choice is based primarily on which firm has the lower price, and the resulting price competition lowers advance prices and profits. Second, competition in the spot period is likely to lower spot period prices, thereby forcing the firms to lower their advance period prices, which again is not favorable to profits. We show that with competition the firms may be better off if they sell only in the spot period. However, the firms may nevertheless find themselves in an equilibrium with advance selling. In this sense, advance selling is better described as a competitive necessity than as an advantageous tool to raise profits.

Keywords: competition, game theory, advance selling