Quality Choice And Capacity Rationing In Advance Selling

With the development of information technology,consumers have more and more ways to obtain product information,which makes consumers more strategic.And product quality and price are important factors that affect strategic consumers' decisions.This is a question worth exploring how to formulate business strategies to maximize profits when seller face strategic consumers who are sensitive to product quality and price.When facing a market with uncertain demand,sellers often use advance selling to stimulate consumer purchase and improve demand forecasting.In the advance selling environment,the number of products in advance period also have an impact on consumers' decision.The small amount of advance selling will create an illusion that the product is tight and delaying the purchase may face the shortage of the product,so they will buy in advance.Therefore,we consider a seller who sells a single product to strategic consumers sensitive to both price and quality over two periods: advance and spot.Customers' types are uncertain in the first period and revealed over time.The seller's decisions include whether to offer the product and,if so,the quality of the product,the prices in both periods,and whether to ration capacity in the advance period.This article takes sellers' profit maximization as the goal,and focusing on how the seller to jointly determine the product quality and capacity rationing policy when selling to strategic consumers.We separate the analysis into three cases: unlimited capacity,limited capacity without returns,and limited capacity with returns.The first case acts as a benchmark for the other two.In each case,backward induction is used to derive the seller's decisions in equilibrium.Research indicates that the seller's decisions on product offering and quality choice are fully determined by the cost coefficient of quality.And the optimal rationing policy is contingent on whether the high-or low-quality product is offered.Further,we show in the case of limited capacity with returns that the firm is optimal to offer full returns.A full refund can reduce the pre-sale discount rate and increase the current sale price,thereby increasing unreturned and formal sales.The profit margin of the product will increase the total profit of the retailer.Finally,our numerical studies show that the seller can benefit from capacity rationing,flexibility on quality choice,and allowing returns.Specifically,the value of rationing is not evident,whereas the values of flexibility on quality choice and returns are both considerably significant.The seller should carefully infer and calculate the cost coefficient of quality.Given that the quality level is determined,the seller must deliberately design the capacity rationing policy since the rationing decision interacts with the decision on quality choice.