Pricing Capacity Over Time and Recourse Strategies: Facilitate Reselling, Offer Refunds/Options, or Overbook?

45 Pages Posted: 29 Aug 2018

See all articles by Gerard P Cachon

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department

Pnina Feldman

Questrom School of Business, Boston University

Date Written: August 14, 2018

Abstract

Perishable capacity is often sold before it is used (e.g., tickets sold weeks before a sporting event) which requires a price path decision (increasing or decreasing over time) and creates the opportunity to include in the pricing mechanism a recourse strategy, i.e., allowing the firm or buyer to change ownership after an initial transaction. For example, a buyer could be allowed to resell the purchased unit to another buyer (e.g., a ticket exchange), or the firm could offer to refund the buyer if the buyer prefers to relinquish the unit, or the firm could overbook, i.e., sell its capacity twice, possibly denying service to the first buyer. Previous work without recourse mechanisms demonstrates the effectiveness of an “advance selling strategy” (an increasing price path) assuming that consumers are uncertain of their preferences early in the horizon. We find that a “price skimming” strategy (a decreasing price path) can dominate advance selling when the firm is unable to precisely determine when consumers learn their preferences. No matter the price path selected, we demonstrate that recourse strategies are generally able to substantially increase the firm’s profit and can at the same time increase buyer welfare. They are effective because they contribute to the two mechanisms that generate value in this system: (i) increase the probability of a transaction and (ii) increase the likelihood the buyer with the highest value gets the capacity. Reselling with sellers posting willingness-to-sell prices is best among recourse strategies even though consumers are able to sell for more than they paid. In fact, reselling either achieves or nearly achieves the firm’s maximum revenue and it can also benefit consumers. We conclude that the firm should encourage reselling, especially when the firm implements an advance selling strategy.

Keywords: Dynamic Pricing, Recourse Strategies, Reselling, Advance Selling, Price Skimming

Suggested Citation

Cachon, Gerard P and Feldman, Pnina, Pricing Capacity Over Time and Recourse Strategies: Facilitate Reselling, Offer Refunds/Options, or Overbook? (August 14, 2018). Available at SSRN: https://ssrn.com/abstract=3235757 or http://dx.doi.org/10.2139/ssrn.3235757

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department ( email )

Philadelphia, PA 19104
United States

Pnina Feldman (Contact Author)

Questrom School of Business, Boston University ( email )

Boston, MA
United States

HOME PAGE: http://https://www.bu.edu/questrom/faculty-research/faculty-directory/pnina-feldman/

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