An Analysis of Advance Booking Discount Programs Between Competing Retailers
As product demand uncertainty increases and life cycles shorten, retailers respond by developing mechanisms for more accurate demand forecasting and supply planning to avoid over-stocking or under-stocking a product. We model the situation in which two retailers consider launching one such mechanism, known as the ‘Advance Booking Discount’ (ABD) program. In this program customers are enticed to pre-commit their orders at a discount price prior to the regular selling season. However, these pre-committed orders are filled during the selling season. While the ABD program enables the retailers to lock in a portion of the customer demand and use this demand information to develop more accurate forecasts and supply plans, the advance booking discount price reduces profit margin. We analyze the four possible scenarios wherein each of the two firms offer an ABD program or not, and establish conditions under which the unique equilibrium calls for launching the ABD program at both retailers. We also provide a detailed numerical example to illustrate how these conditions are affected by the level of demand uncertainty, demand correlation, market share, and fixed costs for instituting an ABD program.
KeywordsExpected Profit Unique Equilibrium Discount Price Demand Uncertainty Optimal Order Quantity
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