Advance-Purchase Discounts and Price Discrimination in Competitive Markets
01 Apr 1998-Journal of Political Economy (The University of Chicago Press)-Vol. 106, Iss: 2, pp 395-422
TL;DR: In this article, price-taking firms may offer advance-purchase discounts when both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, and consumers with relatively more certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations.
Abstract: When both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, price‐taking firms may offer advance‐purchase discounts. Consumers with relatively more certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations and more uncertain aggregate demand increases the price they expect to pay in the spot market. Advance‐purchase sales are made to low‐valuation customers, as predicted by traditional models of second‐degree price discrimination, without assuming that firms have market power.
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TL;DR: In this paper, the authors present a review of various quantitative models for managing supply chain risks and relate various supply chain risk management strategies examined in the research literature with actual practices, highlighting the gap between theory and practice, and motivate researchers to develop new models for mitigating supply chain disruptions.
2,085 citations
Cites background from "Advance-Purchase Discounts and Pric..."
...For example, by considering 2 market segments with different reservation values of the service, Dana (1998) shows analytically that it is rational for customers with relatively more certain demands (planned trips) and customers with relatively lower reservation value (leisure travelers) to commit their purchases in advance....
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...Disney and Towill (2003) develop a simulation model to analyze the bullwhip effect under the VMI initiative....
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TL;DR: In this article, the authors compare two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity).
1,573 citations
TL;DR: In this paper, the authors compare two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity).
Abstract: With crowdfunding, an entrepreneur raises external financing from a large audience (the "crowd"), in which each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. This article compares two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity). In either case, we assume that "crowdfunders" enjoy "community benefits" that increase their utility. Using a unified model, we show that the entrepreneur prefers pre-ordering if the initial capital requirement is relatively small compared with market size and prefers profit sharing otherwise. Our conclusions have implications for managerial decisions in the early development stage of firms, when the entrepreneur needs to build a community of individuals with whom he or she must interact. We also offer extensions on the impact of quality uncertainty and information asymmetry.
1,400 citations
TL;DR: This survey reviews the forty-year history of research on transportation revenue management and covers developments in forecasting, overbooking, seat inventory control, and pricing, as they relate to revenue management.
Abstract: This survey reviews the forty-year history of research on transportation revenue management (also known as yield management). We cover developments in forecasting, overbooking, seat inventory control, and pricing, as they relate to revenue management, and suggest future research directions. The survey includes a glossary of revenue management terminology and a bibliography of over 190 references.
1,162 citations
Cites background from "Advance-Purchase Discounts and Pric..."
...DANA (1998) explains price dispersion as a competitive market reaction to consumers’ uncertainty about travel and the risk of rationing due to capacity constraints....
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TL;DR: It is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts.
Abstract: While every firm in a supply chain bears supply risk (the cost of insufficient supply), some firms may, even with wholesale price contracts, completely avoid inventory risk (the cost of unsold inventory). With a push contract there is a single wholesale price and the retailer, by ordering his entire supply before the selling season, bears all of the supply chain's inventory risk. A pull contract also has a single wholesale price, but the supplier bears the supply chain's inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season. (Examples include Vendor Managed Inventory with consignment and drop shipping.) An advance-purchase discount has two wholesale prices: a discounted price for inventory purchased before the season, and a regular price for replenishments during the selling season. Advance-purchase discounts allow for intermediate allocations of inventory risk: The retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount. This research studies how the allocation of inventory risk (via these three types of wholesale price contracts) impacts supply chain efficiency (the ratio of the supply chain's profit to its maximum profit). It is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts. In other words, the literature has exaggerated the value of implementing coordinating contracts (i.e., contracts that achieve 100% efficiency, such as buy-backs or revenue sharing) because coordinating contracts are compared against an inappropriate benchmark (often just a push contract). Furthermore, if firms also consider advance-purchase discounts, which are also simple to administer, then the coordination of the supply chain and the arbitrary allocation of its profit is possible. Several limitations of advance-purchase discounts are discussed.
592 citations
Cites background from "Advance-Purchase Discounts and Pric..."
...Several papers consider the use of advance selling to consumers that face uncertainty in their own valuation, which is also not considered in this paper (e.g., Dana 1998, Xie and Shugan 2001)....
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...…price is lower than the at-once wholesale price, so the retailer may prebook some inventory (bearing the risk on that inventory) and the supplier may produce additional inventory in anticipation of at-once orders (and bears the risk on that additional production), as in the O’Neill example....
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References
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TL;DR: In this paper, the authors show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intra-firm price dispersion.
Abstract: When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.
288 citations
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TL;DR: In this article, the seller rations supplies by serving customers in order of their selected priorities until the supply is exhausted or all customers are served, depending on the customer's selection of one contract from the menu.
Abstract: tingent forward delivery contracts offered by a seller Each customer's selection of one contract from the menu determines the customer's service order or priority In each contingency, the seller rations supplies by serving customers in order of their selected priorities until the supply is exhausted or all customers are served Various forms of priority service are widely
278 citations
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246 citations
TL;DR: In this article, priority service contracts are defined as the tank order in which a customer is served out of the available supply, until all customers are served or supply is exhausted, i.e., a customer's priority in obtaining service.
Abstract: : The contracts that interest us here are called priority service contracts. The salient feature of such contracts is that they specify each customer's priority in obtaining service. That is, they specify the tank order in which a customer is served out of the available supply, until all customers are served or supply is exhausted. Such contracts essentially establish queues for customers. In Section 1 the author provides some background about priority service. Section 2 formulates a basic model and offer several illustrations. Also describes two main examples that motivate the theoretical development. Section 3 derives some key results that show how the prices of priority service contracts are designed to induce customers to self-select efficient service orders. In Section 4 the author discusses various ways that state enterprises can organize markets that implement priority service efficiently. In Section 5 we study the operation of competitive markets for priority service. Section 6 concludes with some summary remarks. Two themes are emphasized. One is that a state enterprise can promote substantial efficiency gains by substituting priority service for absent spot markets. The other is that oligopolistic firms may have insufficient incentives to offer efficient product diversity; consequently, allocative efficiency depends on entry of numerous firms. Even so, dispersal of supplies among many firms can prevent productive efficiency when there are advantages from pooling supplies.
181 citations
TL;DR: P Phelps et al. as mentioned in this paper defined search unemployment as a sacrifice of present wage earnings in return for the expectations of an improvement in future earnings, and precautionary unemployment is an act of waiting in order to be available for better use later.
Abstract: During the sixties a cornerstone of economic policy was that permanent inflation results in high levels of economic activity. This was based in large part on the observation that prices and output, when measured as deviations from trend, are highly correlated-that is, the Phillips curve. Phelps and others showed that this apparent trade-off could not be explained in modern theoretical terms except possibly as a monetary and transient phenomenon. Inevitably, such an analysis implied a natural rate of unemployment or employment. The path-breaking book, The New Microeconomics in Employment Theory (New York: W. W. Norton & Co., 1970), by Edmund S. Phelps et al., contains most of these studies. In the first part of the book under review (Edmund S. Phelps, Inflation Policy and Unemployment Theory: The Cost Benefit Approach to Monetary Planning [London: Macmillan Co., 1972]), these and related developments in unemployment theory are synthesized and presented in a lucid and elegant manner. I recommend this book to all economists interested in understanding the new theory. Within the framework of modern unemployment theory, each of the three basic definitions employed treats unemployment as a private investment: (1) Search unemployment is a sacrifice of present wage earnings in return for the expectations of an improvement in future earnings. (2) Precautionary unemployment is an act of waiting in order to be available for better use later. (3) In the neoclassical speculative labor supply model, unemployment is an intended intertemporal trade of present leisure for an expected improvement in leisure cost of future consumption and future leisure. To this list I would add layoff unemployThe author thanks Robert E. Lucas, Jr., and Edmund S. Phelps for commenting on
177 citations