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Advance Selling Without Showing the Price? The Roles of Anecdotal Reasoning and Capacity

Huang, T; Advance Selling Without Showing the Price? The Roles of Anecdotal Reasoning and Capacity. In: Netessine, S, (ed.) (Proceedings) MSOM 2013 Supply Chain SIG Conference.

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Abstract

Motivated by the recent practice, we study the advance selling strategy without showing the price (which may be coined as "probabilistic pricing"). Admittedly, this (perhaps) surprising practice may be due to many different reasons (e.g., price postponement, cost considerations, and so on). However, we offer a novel behavioral explanation for such a practice. We show that such a practice can actually be optimal when customers have boundedly rational expectations via anecdotal reasoning to anticipate the firm's pricing strategy. This bounded rationality thus induces the firm to strategically randomize prices to create intentional uncertainty for customers' decision making, even in the absence of demand and valuation uncertainties. Scarce capacity creates availability obfuscation (on top of stock-out risk) and may reduce the incentive for price obfuscation. We further find that if customers are not highly strategic (i.e., forward-looking), it is optimal to charge a fixed price that coincides with the optimal price with fully rational customers. Demand uncertainty does not influence the optimality of price obfuscation but tends to weaken its magnitude, and customers' valuation uncertainty may sometimes intensify the firm's incentives to obfuscate.

Type: Proceedings paper
Title: Advance Selling Without Showing the Price? The Roles of Anecdotal Reasoning and Capacity
Event: MSOM 2013 Supply Chain SIG Conference
Location: INSEAD, France
Dates: 30 July 2013 - 31 July 2013
UCL classification: UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: http://discovery.ucl.ac.uk/id/eprint/1390411
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