Fall 2007 Seminar Series

DATE: November 29
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the ORC ConferenceRoom, E40-106

SPEAKER:
Roman Kapuscinski

TITLE
Advance Selling with Limited Capacity and Customers' Dependent Valuations

ABSTRACT
We consider a seller with limited capacity who offers a single product to customers twice, in advance and in spot markets. Customers have uncertain valuations, which are resolved in spot period, and choose when to purchase the product and at what price. Customers' valuations may be inter-dependent. Facing these strategic customers the seller must choose price in each period as well as a portion of the total capacity to offer in advance.

We describe how the optimal strategy and benefits of advance selling depend on production/service characteristics such as unit cost, capacity level, advance and spot market size, and customer behavior. Particularly, we analyze when the seller should offer advance selling and whether advance price adds a premium or a discount to the spot price, especially as a function of available capacity.

We find that the critical factor in seller's strategy is inter-dependency of customers' valuations, which leads to qualitatively different optimal strategies. To investigate this, we consider varying degrees of customers' interdependency and compare the resulting policies.

This is joint work with Man Yu and Hyun-Soo Ahn