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Advance-Purchase Programs: When to Introduce and What to Inform Consumers

Abstract

We study a two-stage model in which the information processed by consumers at the first stage (advance-purchase stage) is endogenously determined. In the model, the firm decides whether to introduce an advance-purchase program, chooses what attribute information to disclose and determines an advance-purchase price and a retail price. Forward-looking consumers strategically choose, based on the disclosed information, to buy in advance or to make a purchase decision at the second stage (retail stage) when all information is revealed. We characterize the firm's optimal choice on the advance-purchase program and the strategy of information disclosure. In particular, we show that the firm always prefers to introduce the advance-purchase program except when underlying consumer preferences are extremely homogenous. In addition, we find that fully revealing horizontal product information at the advance-purchase stage is never optimal to the firm, but revealing either partial or no product information can be optimal depending on the underlying consumer preferences. Our finding that partial information disclosure is sometimes optimal to the firm is in contrast to the result in the literature of horizontal information provision that a firm maximizes profit by revealing either no or full information to consumers.advance purchase, information disclosure, dynamic pricing

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This paper was published in Research Papers in Economics.

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