Advance Sales of Services

We investigate a service provider’s advance selling strategies in the presence of a channel intermediary who improves (i) consumers’ accessibility to the service or (ii) the service provider’s access to higher valuation segments. We evaluate the conditions under which dealing with such an intermediary may offset the attendant costs of providing suitable incentives. Our results indicate that the relative profitability of selling via the intermediary is affected by an interaction among marginal costs, capacity level, and the type of value the intermediary brings to the channel. We find that a capacity-constrained service provider may prefer selling via an intermediary that offers improved access to higher valuation consumers. However, when the service provider has excess capacity, indirect sales is preferred even when the intermediary is simply expanding the reach. In such a setting, both the service provider and the intermediary can enhance their profits in a symbiotic manner. Our findings have several implications for service providers. A service provider with limited capacity and relatively small marginal cost would be better off not contracting with an intermediary. In contrast, service providers with larger capacity and marginal cost will benefit from using an indirect channel despite the costs of incentivizing such an intermediary.