Pricing with Product Rollover in Advance Selling

Abstract

In the presence of frequent product rollovers, forward-looking customers may choose between buying an old product that is currently available and waiting for a new product that will be released in a future period. This paper investigates the profitability of advance selling in managing customers' choice between two generations of products. We consider a finite selling horizon for the old product and potential customers arrive following a Poisson process. Customers are strategic and choose the product that maximizes their utility. Upon arrival, a customer can buy a unit of old product at the current price, or wait and buy a new product, or to leave the system without purchasing any product. Moreover, a waiting customer may become impatient and renege during waiting. In addition, the new product that will be available in the future is generally superior compared with the old product regarding appearance, functionality, and overall quality. Customers are heterogeneous in their response to product quality. We fully characterize the optimal choice behavior of customers during different stages. Taking into account the optimal choice behavior of customers, a firm determines whether or not to offer an advance selling option, which guarantees customers a future new product at a pre-determined price. In the base model where the price of the old product is fixed at the regular level, we fully characterize the firm's optimal advance selling price. In an extended model in which the old product can be discounted as well, we investigate the jointly optimal pricing decisions for the old and new products and characterize the structural properties of the optimal decisions. Our analysis reveals that advance selling may have varying impacts during different time periods. In particular, the discount strategy may act as a substitute of the pre-order option during the early periods of the late stage; and a markdown on old product may induce a higher advance selling price in the late stage. Our numerical experiments further demonstrate that dynamic advance selling has great potential to improve profit, as compared to regular selling and static advance selling.

Keywords: Advance Selling; Dynamic Pricing; Product Rollover; Customer Choice Behavior