Rationing Capacity in Advance Selling to Signal Quality

36 Pages Posted: 21 Aug 2013 Last revised: 8 Oct 2013

See all articles by Man Yu

Man Yu

Hong Kong University of Science & Technology (HKUST)

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

Roman Kapuscinski

University of Michigan, Stephen M. Ross School of Business

Date Written: August 21, 2012

Abstract

We consider a seller who can sell her product over two periods, advance and spot. The seller has private information about the product quality, which is unknown to customers in advance and publicly revealed in spot. The question we consider is whether the seller has an incentive to signal quality in advance and, if so, how she can convey a credible signal of product quality.

We characterize the seller's signaling strategy and find that rationing of capacity in the advance period is an effective tool of signaling product quality. We find that the high-quality seller can distinguish herself by allocating less capacity than the low-quality seller in the advance period. We show that this signaling mechanism exists whenever advance selling would be optimal for both the high-quality and low-quality sellers if quality information was symmetric. We compare capacity rationing with other signaling tools, such as pricing and advertising, and show that capacity rationing is the preferred one.

Despite its capability of conveying quality information more efficiently than other tools, capacity rationing may still be very costly for the seller. When compared to the case when rationing was not allowed, the seller's ability to ration (rationing flexibility) sometimes makes the seller worse off, independently of her quality.

Keywords: advance selling, strategic customers, signaling quality

JEL Classification: D45, D82, L11

Suggested Citation

Yu, Man and Ahn, Hyun-Soo and Kapuscinski, Roman, Rationing Capacity in Advance Selling to Signal Quality (August 21, 2012). Ross School of Business Paper No. 1204, Available at SSRN: https://ssrn.com/abstract=2313474 or http://dx.doi.org/10.2139/ssrn.2313474

Man Yu (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Roman Kapuscinski

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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