Joint pricing and overbooking policy in a full payment presale mechanism of new products

• Date: 01 September 2019
• Author: Wei Pan,Bo He,Yange Yang
• DOI: http://doi.org/10.1111/itor.12436
• Published date: 01 September 2019

Intl. Trans. in Op. Res. 26 (2019) 1810–1827

DOI: 10.1111/itor.12436

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Joint pricing and overbooking policy in a full payment presale

mechanism of new products

Bo Hea,WeiPan

band Yange Yangc

aSchool of Economics and Business Administration, Chongqing University, Shazheng Street,Chongqing, 400044, China

bSchool of Economics and Management, Wuhan UniversityWuhan, China

cChina Coal TechnologyEngineering Group Chongqing Research Institute, Chongqing, China

E-mail: hebo@cqu.edu.cn [He]; mrpanwei2000@163.com [Pan]; nikuailema@21cn.com [Yang]

Received 1 November2016; received in revised form 31 March 2017; accepted 18 May 2017

Abstract

This paper investigates a full payment presale mechanism of new products, in which consumers make a

full payment while booking and are allowed to cancel their bookings with full refunds before the products’

delivery time. To fully utilize the limited capacity, the manufacturer can incorporate the overbooking policy

into the full payment presale mechanism by jointly setting its sales price and booking limit. We analyze the

manufacturer’s revenue maximization problem and develop some useful properties. In addition, we propose

an iterative algorithm for solving this problem. Finally, we conduct numerical computations to evaluate the

overbooking policy and examine the impacts of relevant parameters on the expected profits. We find that the

overbooking policy will benefit the manufacturer. However, a higher capacity will not necessarily lead to a

higher profit for a manufacturer with an overbooking policy.

Keywords:full payment presale; manufacturing-marketing interface; newsvendor; overbooking

1. Introduction

Having entered the smartphone market less than five years ago, Huawei and Xiaomi, two Chinese

tech firms, presently stand as the world’s fifth and third largest smartphone makers by market

share, respectively, according to Counterpoint Research. According to the research firm, Canalys,

Huawei’s third quarter shipments in 2015 surpassed Apple and Samsung. Huawei and Xiaomi owe

their mega robustness in sales to their marketing strategies, which have conquered the hearts of

the masses in addition with their effective and flexible production strategies. One of the successful

marketing strategies often employed by both firms is the full payment presale. For example, Huawei

implemented the full payment presale mechanism to sell Honor 7, a new type of smartphone, in

Malaysia (Fig. 1).

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

USA.

B. He et al. / Intl. Trans. in Op. Res. 26 (2019) 1810–1827 1811

Fig. 1. Full payment presale mechanism of HuaweiHonor 7.

The full payment presale mechanism is successfully implemented by these two firms to sell new

products in many other countries and regions, such as China, Hong Kong, and Africa. Incidentally,

the full payment presale mechanism is also employed by some online shopping platforms such as

Yihaodian (www.yhd.com). This mechanism is, in particular, appropriate for new products that are

in great demand. With this mechanism, consumers are guaranteed to obtain the new products at

the time of release. As for the manufacturers, they are able to lock in the consumers in advance and

acquire demand information for better capacity planning. However, there are few reports on the

full payment presale mechanism, which ought to be paid more attention. Thus, it motivates us to

further investigate the implications and possible applications of this mechanism for manufacturing

firms.

In practice, there is another marketing strategy that is used, i.e., advance selling, which gains

popularity for books, CDs, video games, and software. As defined by Xie and Shugan (2009),

advance selling refers to a marketing practice that a seller uses to induce buyers to commit to

purchasing a good before the time of consumption in which it can take many different forms.

The full payment presale mechanism can be seen as a variant of advance selling. However, there

are several distinctions between the full payment presale and advance selling. First, advance selling

usually comprises two periods,the advance selling period and the spot period, while the full payment

presale has only one period, the presale period; the full payment presale also has no spot selling

(online exclusive). Therefore, with the advance selling, the products are sold at a discount price in

the advance selling period and at a full price in the spot period. With the full payment presale, the

products are sold at a full price. So, the second distinction is that there is no price discount in the

full payment presale while a price discount is integral to advance selling. This difference is very

important because a price discount in advance selling may hurt a firm’s brand image and incur

consumers’ opportunistic behaviors. Third, order cancellation is not allowed under advance selling

but is allowed under the full payment presale. Last, the advance selling is often seen adopted by

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation of OperationalResearch Societies