Advance Selling to Ease Financial Distress

97 Pages Posted: 1 Jan 2021 Last revised: 11 Oct 2023

See all articles by Yiangos Papanastasiou

Yiangos Papanastasiou

University of California, Berkeley - Haas School of Business

Shuang Xiao

Zhongnan University of Economics and Law - School of Finance

S. Alex Yang

London Business School

Date Written: Sep 13, 2023

Abstract

Left unable to provide service during the COVID-19 pandemic, many small businesses have experimented with alternative ways of generating income. One approach that has gained traction is the use of advance selling, whereby the firm asks consumers in its local community to support the business by paying in advance for consumption at a future date. In this paper, we develop a game theoretic model to investigate whether and how advance selling schemes can be successfully implemented by firms facing financial distress. In cases of high distress (i.e., where obtaining bank financing is infeasible given the firm's financial need), we show that advance selling in its classic implementation can help the firm secure its survival in some scenarios, but may suffer from significant inefficiencies associated with strategic consumer behavior and firm moral hazard. We demonstrate that two modifications of the classic scheme currently observed in practice---namely, (i) the introduction of an ``all-or-nothing" clause, and (ii) selling future discount coupons as opposed to the full service---can expand the set of scenarios in which survival is ensured, while also allowing the firm to extract higher profit. In cases of moderate financial distress (i.e., where bank financing is a feasible but inefficient option), we find that simple advance selling schemes typically fail to make an impact. However, we show that a more complex scheme, combining both of the aforementioned modifications simultaneously, can be used in conjunction with bank financing to generate a substantial improvement in firm profit.

Keywords: advance selling, ooperations management, OM-Finance interface, strategic consumers, moral hazard

Suggested Citation

Papanastasiou, Yiangos and Xiao, Shuang and Yang, S. Alex, Advance Selling to Ease Financial Distress (Sep 13, 2023). Available at SSRN: https://ssrn.com/abstract=3756746 or http://dx.doi.org/10.2139/ssrn.3756746

Yiangos Papanastasiou

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Shuang Xiao

Zhongnan University of Economics and Law - School of Finance ( email )

WenQuan Building, 182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

S. Alex Yang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://salexyang.com

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