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Advance Selling in the Presence of Speculators and Forward-Looking Consumers

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Abstract

This article examines the pricing policy of a monopolist seller who may sell in advance of consumption in a market that comprises of myopic consumers, forward-looking consumers, and speculators. The latter group has no consumption value for the goods and is in the market with the sole objective of making a profit by reselling the purchased goods shortly after. Consumers, although homogeneous in terms of their valuations, are different with respect to their perspectives. We show that in an “upward” market where the expected valuation increases over time, the optimal pricing policy is an ex ante “static” one where the seller “prices into the future” and prices the myopic consumers out of the advance market. However, in a “downward” market where the expected valuation decreases over time, the seller adopts a dynamic pricing strategy except for the case when higher initial sales can trigger more demand subsequently and when the downward trend is not too high. In this case, the seller prefers an ex ante “static” pricing strategy and deliberately prices lower initially to sell to speculators. We identify the conditions under which the seller benefits from the existence of speculators in the market. Moreover, although the presence of entry costs is ineffective as an entry deterrence, we determine the conditions under which exit costs can rein in speculative purchase.

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