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Open AccessOpen Access JUSTC Management 30 August 2022

An advance selling strategy with a trade-in program

  • School of Management, University of Science and Technology of China, Hefei 230026, China

Cite this:
https://doi.org/10.52396/JUSTC-2021-0250
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  • Corresponding author: E-mail: chenzhix@mail.ustc.edu.cn
  • Received Date: 27 November 2021
  • Accepted Date: 19 February 2022
    • Available Online: 30 August 2022
    Abstract

  • Abstract

    Recently, advance selling and trade-in programs have become increasingly popular in many industries. While previous studies have examined these two strategies individually, the combination of both strategies has not been studied. Inspired by business practices, we investigate an emerging advance selling strategy (hereinafter, the AT strategy) that utilizes the trade-in concept as a reward or discount for participating in the advance selling program. This study explores a seller’s optimal pricing decision and profit when using the AT strategy, traditional advance selling (AS), and traditional trade-in (TN) strategies. We find that, compared to AT strategy, it is better for the seller to adopt the AS strategy when the salvage value of used products is sufficiently low and the product cost is not too small. In addition, compared to TN, when the salvage value and product cost are relatively low, the seller should adopt the AT strategy under most circumstances. Furthermore, we demonstrate that sellers can still gain profits when the product price is extremely high under the AT strategy. Even if consumer utility is negative during the advance selling period, consumers are willing to participate in AT programs because the total consumer surplus from buying two generations of products is positive.

    Abstract

    Recently, advance selling and trade-in programs have become increasingly popular in many industries. While previous studies have examined these two strategies individually, the combination of both strategies has not been studied. Inspired by business practices, we investigate an emerging advance selling strategy (hereinafter, the AT strategy) that utilizes the trade-in concept as a reward or discount for participating in the advance selling program. This study explores a seller’s optimal pricing decision and profit when using the AT strategy, traditional advance selling (AS), and traditional trade-in (TN) strategies. We find that, compared to AT strategy, it is better for the seller to adopt the AS strategy when the salvage value of used products is sufficiently low and the product cost is not too small. In addition, compared to TN, when the salvage value and product cost are relatively low, the seller should adopt the AT strategy under most circumstances. Furthermore, we demonstrate that sellers can still gain profits when the product price is extremely high under the AT strategy. Even if consumer utility is negative during the advance selling period, consumers are willing to participate in AT programs because the total consumer surplus from buying two generations of products is positive.

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    • References(32)
  • [1]
    Shugan S M, d Xie J H. Advance pricing of services and other implications of separating purchase and consumption. Journal of Service Research, 2000, 2 (3): 227–239. doi: 10.1177/109467050023001
    [2]
    Shugan S M, Xie J H. Advance selling for services. California Management Review, 2004, 46 (3): 37–54. doi: 10.2307/41166220
    [3]
    Shugan S M, Xie J H. Advance-selling as a competitive marketing tool. International Journal of Research in Marketing, 2005, 22 (3): 351–373. doi: 10.1016/j.ijresmar.2004.11.004
    [4]
    Tang C S, Rajaram K, Alptekinoğlu A, et al. The benefits of advance booking discount programs: Model and analysis. Management Science, 2004, 50 (4): 465–478. doi: 10.1287/mnsc.1030.0188
    [5]
    Zhao X Y, Stecke K E. Pre-orders for new to-be-released products considering consumer loss aversion. Production and Operations Management, 2010, 19 (2): 198–215. doi: 10.1111/j.1937-5956.2009.01092.x
    [6]
    Prasad A, Stecke K E, Zhao X Y. Advance selling by a newsvendor retailer. Production and Operations Management, 2011, 20 (1): 129–142. doi: 10.1111/j.1937-5956.2010.01133.x
    [7]
    DeGraba P. Buying frenzies and seller-induced excess demand. The RAND Journal of Economics, 1995, 26 (2): 331–342.
    [8]
    Gundepudi P, Rudi N, Seidmann A. Forward versus spot buying of information goods. Journal of Management Information Systems, 2001, 18 (2): 107–131. doi: 10.1080/07421222.2001.11045680
    [9]
    Xie J H, Shugan S M. Electronic tickets, smart cards, and online prepayments: When and how to advance sell. Marketing Science, 2001, 20 (3): 219–243. doi: 10.1287/mksc.20.3.219.9765
    [10]
    Xie J H, Shugan S M. Chapter 21: Advance selling theory. In: Rao V R editor. Handbook of Pricing Research in Marketing. US: Edward Elgar Pub, 2009: 451− 476.
    [11]
    Fay S, Xie J H. The economics of buyer uncertainty: Advance selling vs. probabilistic selling. Marketing Science, 2010, 29 (6): 1040–1057. doi: 10.1287/mksc.1100.0576
    [12]
    McCardle K, Rajaram K, Tang C S. Advance booking discount programs under retail competition. Management Science, 2004, 50 (5): 701–708. doi: 10.1287/mnsc.1040.0202
    [13]
    Gao F, Demirag O C, Chen F Y. Early sales of seasonal products with weather-conditional rebates. Production and Operations Management, 2012, 21 (4): 778–794. doi: 10.1111/j.1937-5956.2011.01298.x
    [14]
    Li C H, Zhang F Q. Advance demand information, price discrimination, and preorder strategies. Manufacturing & Service Operations Management, 2012, 15 (1): 57–71. doi: DOI:10.1287/msom.1120.0398
    [15]
    Aviv Y, Pazgal A. Optimal pricing of seasonal products in the presence of forward-looking consumers. Manufacturing & Service Operations Management, 2008, 10 (3): 339–359. doi: https://doi.org/10.1287/msom.1070.0183
    [16]
    Aviv Y, Wei M M, Zhang F Q. Responsive pricing of fashion products: The effects of demand learning and strategic consumer behavior. Management Science, 2019, 65 (7): 2982–3000. doi: 10.1287/mnsc.2018.3114
    [17]
    Zhao X Y, Pang Z, Stecke K E. When does a retailer’s advance selling capability benefit manufacturer, retailer, or both? Production and Operations Management, 2016, 25 (6): 1073–1087. doi: 10.1111/poms.12535
    [18]
    Yu M, Kapuscinski R, Ahn H S. Advance selling: Effects of interdependent consumer valuations and seller’s capacity. Management Science, 2015, 61 (9): 2100–2117. doi: 10.1287/mnsc.2014.2047
    [19]
    Wei M M, Zhang F Q. Advance selling to strategic consumers: Preorder contingent production strategy with advance selling target. Production and Operations Management, 2018, 27 (7): 1221–1235. doi: 10.1111/poms.12863
    [20]
    Pang Z, Xiao W Q, Zhao X Y. Preorder price guarantee in e-commerce. Manufacturing & Service Operations Management, 2019, 23 (1): 123–138. doi: https://doi.org/10.1287/msom.2019.0819
    [21]
    Van Ackere A, Reyniers D J. Trade-ins and introductory offers in a monopoly. The RAND Journal of Economics, 1995, 26 (1): 58–74.
    [22]
    Ray S, Boyaci T, Aras N. Optimal prices and trade-in rebates for durable, remanufacturable products. Manufacturing & Service Operations Management, 2005, 7 (3): 208–228. doi: https://doi.org/10.1287/msom.1050.0080
    [23]
    Rao R S, Narasimhan O, John G. Understanding the role of trade-ins in durable goods markets: Theory and evidence. Marketing Science, 2009, 28 (5): 950–967. doi: 10.1287/mksc.1080.0461
    [24]
    Agrawal V V, Ferguson M, Souza G C. Trade-in rebates for price discrimination and product recovery. IEEE Transactions on Engineering Management, 2016, 63 (3): 326–339. doi: 10.1109/TEM.2016.2574244
    [25]
    Zhu X X, Wang M M, Chen G F, et al. The effect of implementing trade-in strategy on duopoly competition. European Journal of Operational Research, 2016, 248 (3): 856–868. doi: 10.1016/j.ejor.2015.07.053
    [26]
    Fudenberg D, Tirole J. Upgrades, trade-ins, and buybacks. The RAND Journal of Economics, 1998, 29 (2): 235–258. doi: 10.2307/2555887
    [27]
    Okada E M. Trade-ins, mental accounting, and product replacement decisions. Journal of Consumer Research, 2001, 27 (4): 433–446. doi: 10.1086/319619
    [28]
    Yin R, Tang C S. Optimal temporal customer purchasing decisions under trade-in programs with up-front fees. Decision Sciences, 2014, 45 (3): 373–400. doi: 10.1111/deci.12081
    [29]
    Yin R, Li H M, Tang C S. Optimal pricing of two successive-generation products with trade-in options under uncertainty. Decision Sciences, 2015, 46 (3): 565–595. doi: 10.1111/deci.12139
    [30]
    Zhang F Q, Zhang R Y. Trade-in remanufacturing, customer purchasing behavior, and government policy. Manufacturing & Service Operations Management, 2018, 20 (4): 601–616. doi: https://doi.org/10.1287/msom.2017.0696
    [31]
    Hu S, Ma Z J, Sheu J B. Optimal prices and trade-in rebates for successive-generation products with strategic consumers and limited trade-in duration. Transportation Research Part E: Logistics and Transportation Review, 2019, 124: 92–107. doi: 10.1016/j.tre.2019.02.004
    [32]
    Xiao Y B, Zhou S X. Trade-in for cash or for upgrade? Dynamic pricing with customer choice. Production and Operations Management, 2020, 29 (4): 856–881. doi: 10.1111/poms.13140
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    Figure  1.  iPhone SE trade-in plan on JD.com ( http://tech.cnr.cn/techph/20200416/t20200416_525056130.shtml. Accessed April 16, 2020).

    Figure  2.  Sequence of events.

    Figure  3.  Sequence of events.

    Figure  4.  Sequence of events.

    Figure  5.  Impact of product cost c on optimal profit under different programs.

    Figure  6.  Impact of salvage value s on optimal profit and pricing under different programs.

    Figure  7.  Impact of product durability δ on optimal profit and pricing under different programs.

    [1]
    Shugan S M, d Xie J H. Advance pricing of services and other implications of separating purchase and consumption. Journal of Service Research, 2000, 2 (3): 227–239. doi: 10.1177/109467050023001
    [2]
    Shugan S M, Xie J H. Advance selling for services. California Management Review, 2004, 46 (3): 37–54. doi: 10.2307/41166220
    [3]
    Shugan S M, Xie J H. Advance-selling as a competitive marketing tool. International Journal of Research in Marketing, 2005, 22 (3): 351–373. doi: 10.1016/j.ijresmar.2004.11.004
    [4]
    Tang C S, Rajaram K, Alptekinoğlu A, et al. The benefits of advance booking discount programs: Model and analysis. Management Science, 2004, 50 (4): 465–478. doi: 10.1287/mnsc.1030.0188
    [5]
    Zhao X Y, Stecke K E. Pre-orders for new to-be-released products considering consumer loss aversion. Production and Operations Management, 2010, 19 (2): 198–215. doi: 10.1111/j.1937-5956.2009.01092.x
    [6]
    Prasad A, Stecke K E, Zhao X Y. Advance selling by a newsvendor retailer. Production and Operations Management, 2011, 20 (1): 129–142. doi: 10.1111/j.1937-5956.2010.01133.x
    [7]
    DeGraba P. Buying frenzies and seller-induced excess demand. The RAND Journal of Economics, 1995, 26 (2): 331–342.
    [8]
    Gundepudi P, Rudi N, Seidmann A. Forward versus spot buying of information goods. Journal of Management Information Systems, 2001, 18 (2): 107–131. doi: 10.1080/07421222.2001.11045680
    [9]
    Xie J H, Shugan S M. Electronic tickets, smart cards, and online prepayments: When and how to advance sell. Marketing Science, 2001, 20 (3): 219–243. doi: 10.1287/mksc.20.3.219.9765
    [10]
    Xie J H, Shugan S M. Chapter 21: Advance selling theory. In: Rao V R editor. Handbook of Pricing Research in Marketing. US: Edward Elgar Pub, 2009: 451− 476.
    [11]
    Fay S, Xie J H. The economics of buyer uncertainty: Advance selling vs. probabilistic selling. Marketing Science, 2010, 29 (6): 1040–1057. doi: 10.1287/mksc.1100.0576
    [12]
    McCardle K, Rajaram K, Tang C S. Advance booking discount programs under retail competition. Management Science, 2004, 50 (5): 701–708. doi: 10.1287/mnsc.1040.0202
    [13]
    Gao F, Demirag O C, Chen F Y. Early sales of seasonal products with weather-conditional rebates. Production and Operations Management, 2012, 21 (4): 778–794. doi: 10.1111/j.1937-5956.2011.01298.x
    [14]
    Li C H, Zhang F Q. Advance demand information, price discrimination, and preorder strategies. Manufacturing & Service Operations Management, 2012, 15 (1): 57–71. doi: DOI:10.1287/msom.1120.0398
    [15]
    Aviv Y, Pazgal A. Optimal pricing of seasonal products in the presence of forward-looking consumers. Manufacturing & Service Operations Management, 2008, 10 (3): 339–359. doi: https://doi.org/10.1287/msom.1070.0183
    [16]
    Aviv Y, Wei M M, Zhang F Q. Responsive pricing of fashion products: The effects of demand learning and strategic consumer behavior. Management Science, 2019, 65 (7): 2982–3000. doi: 10.1287/mnsc.2018.3114
    [17]
    Zhao X Y, Pang Z, Stecke K E. When does a retailer’s advance selling capability benefit manufacturer, retailer, or both? Production and Operations Management, 2016, 25 (6): 1073–1087. doi: 10.1111/poms.12535
    [18]
    Yu M, Kapuscinski R, Ahn H S. Advance selling: Effects of interdependent consumer valuations and seller’s capacity. Management Science, 2015, 61 (9): 2100–2117. doi: 10.1287/mnsc.2014.2047
    [19]
    Wei M M, Zhang F Q. Advance selling to strategic consumers: Preorder contingent production strategy with advance selling target. Production and Operations Management, 2018, 27 (7): 1221–1235. doi: 10.1111/poms.12863
    [20]
    Pang Z, Xiao W Q, Zhao X Y. Preorder price guarantee in e-commerce. Manufacturing & Service Operations Management, 2019, 23 (1): 123–138. doi: https://doi.org/10.1287/msom.2019.0819
    [21]
    Van Ackere A, Reyniers D J. Trade-ins and introductory offers in a monopoly. The RAND Journal of Economics, 1995, 26 (1): 58–74.
    [22]
    Ray S, Boyaci T, Aras N. Optimal prices and trade-in rebates for durable, remanufacturable products. Manufacturing & Service Operations Management, 2005, 7 (3): 208–228. doi: https://doi.org/10.1287/msom.1050.0080
    [23]
    Rao R S, Narasimhan O, John G. Understanding the role of trade-ins in durable goods markets: Theory and evidence. Marketing Science, 2009, 28 (5): 950–967. doi: 10.1287/mksc.1080.0461
    [24]
    Agrawal V V, Ferguson M, Souza G C. Trade-in rebates for price discrimination and product recovery. IEEE Transactions on Engineering Management, 2016, 63 (3): 326–339. doi: 10.1109/TEM.2016.2574244
    [25]
    Zhu X X, Wang M M, Chen G F, et al. The effect of implementing trade-in strategy on duopoly competition. European Journal of Operational Research, 2016, 248 (3): 856–868. doi: 10.1016/j.ejor.2015.07.053
    [26]
    Fudenberg D, Tirole J. Upgrades, trade-ins, and buybacks. The RAND Journal of Economics, 1998, 29 (2): 235–258. doi: 10.2307/2555887
    [27]
    Okada E M. Trade-ins, mental accounting, and product replacement decisions. Journal of Consumer Research, 2001, 27 (4): 433–446. doi: 10.1086/319619
    [28]
    Yin R, Tang C S. Optimal temporal customer purchasing decisions under trade-in programs with up-front fees. Decision Sciences, 2014, 45 (3): 373–400. doi: 10.1111/deci.12081
    [29]
    Yin R, Li H M, Tang C S. Optimal pricing of two successive-generation products with trade-in options under uncertainty. Decision Sciences, 2015, 46 (3): 565–595. doi: 10.1111/deci.12139
    [30]
    Zhang F Q, Zhang R Y. Trade-in remanufacturing, customer purchasing behavior, and government policy. Manufacturing & Service Operations Management, 2018, 20 (4): 601–616. doi: https://doi.org/10.1287/msom.2017.0696
    [31]
    Hu S, Ma Z J, Sheu J B. Optimal prices and trade-in rebates for successive-generation products with strategic consumers and limited trade-in duration. Transportation Research Part E: Logistics and Transportation Review, 2019, 124: 92–107. doi: 10.1016/j.tre.2019.02.004
    [32]
    Xiao Y B, Zhou S X. Trade-in for cash or for upgrade? Dynamic pricing with customer choice. Production and Operations Management, 2020, 29 (4): 856–881. doi: 10.1111/poms.13140
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