Pre-Orders for New To-Be-Released Products Considering Consumer Loss Aversion

Advance selling through pre-orders is a strategy to transfer inventory risk from a retailer to consumers. A newsvendor retailer can have three strategies to choose from: no advance selling allowed (NAS), moderate advance selling with a moderate discount for pre-orders (MAS), and deep advance selling with a deep discount for pre-orders (DAS). MAS allows for intermediate allocations of inventory risk: The retailer bears the risk on inventory carried for the selling season because of demand uncertainty while consumers bear the risk on products purchased in advance because of consumer valuation uncertainty. DAS completely transfers inventory risk from a retailer to consumers. This research studies how a retailer could design an advance selling strategy to maximize her own profits.