Preorder Price Guarantee in e-Commerce

Problem definition: With the development of the internet and e-commerce, retailers often offer preorders for new, to-be-released products. To encourage preorders, retailers such as Amazon offer preorder price guarantee (PG). That is, if the product price drops before or on the release date, preorder consumers automatically receive a refund for the difference between the preorder price and the new price. Should retailers offer PG for preorders? If so, how should they decide the prices and inventory level? Academic/practical relevance: Both advance selling and price matching have been observed in practice and studied in literature. However, the combination of these two is a new phenomenon in practice and receives very limited attention in academic. So our study is closely related to both academic and practical communities. Methodology: Dynamic pricing and game theory. Results: We find that, if preorder demand uncertainty is high, a firm should adopt PG in advance selling. If preorder demand uncertainty is low, then a firm should adopt PG if and only if the percentage of high-valuation consumers is high. Furthermore, we find that a firm's optimal profit under PG monotonically increases in preorder demand uncertainty while the firm's optimal profit without PG stays unchanged. That is, PG enables a firm to profit from preorder demand uncertainty. In addition, we show that price commitment is dominated by dynamic pricing when the retailer can optimally decide whether to offer PG under dynamic pricing. We also demonstrate that a retailer should sell in advance if a product's marginal cost is less than a certain threshold, which is higher than the traditional threshold in the advance selling literature without consideration of PG. Managerial implications: Our results provide guidance for retailers on whether or not they should offer PG and how to design the prices under PG.