Advanced Selling Strategies with Competition
41 Pages Posted: 6 May 2002
Date Written: February 9, 2001
With advancement in new technologies (specifically, Internet and Smartcard technology), small service providers can develop the capability to implement complex pricing strategies, previously enjoyed by only large service providers. Advance selling is one of those strategies.
This paper investigates advance selling in a competitive setting. Prior research has shown that, given the capability, advance selling can be a powerful tool for a monopolist and can improve profits (by as much as 100%). This situation occurs under surprisingly general conditions that are not industry specific. However, advance selling in competitive situations may create other forms of competition such as competition with competitors in the advance period and sellers competing with themselves across time.
We allow one seller to have market power in the sense that buyers are willing to pay a premium to buy from that seller. In that context, we ask some questions. For example, we ask: Do conclusions regarding whether monopolists should advance sell generalize to competitive situations? Can a seller improve profits by unilaterally developing the capability of advance selling and what is the impact on competitors' profits? When all sellers develop this capability, will gains in profits vanish? Is it more important for some types of sellers to advance sell than other types? What is the impact on consumer surplus of one or more sellers advance selling?
We find that, as with the case of a monopolist, any seller that has the unilateral capability to advance sell should do so provided that they have sufficient differentiation to maintain a sufficiently high spot price. When only one seller advance sells, that seller improves profits. The improvement is sometimes at the expense of the other seller, but not always. When a seller without market power advance sells, it can hurt the profits of the competitor. When a seller with market power advance sells, it does not hurt the profits of the competitor. When both sellers advance sell, everyone can potentially gain. The profits of both sellers increase and buyer surplus can increase as well. It is more important for the seller with market power to develop the capability of advance selling because that seller would be hurt if the competitive seller unilaterally developed that capability. However, from a consumer viewpoint, it might not be desirable for the seller with market power to unilaterally develop the capability of advance selling. When only the seller with market power advance sells, that seller may improve profits at the expense of buyer surplus. When both sellers advance sell, buyer surplus does not decrease and can increase (when market power is not too large).
Beyond providing profit and buyer surplus implications, we also provide pricing implications in these different scenarios.
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