Summary: When a retailer launches a new product, the lack of information on market size and consumer valuation lead to yield uncertainty for the retailer concerning demand and therefore lead to risks in production. Under advance selling, the pre-orders may signal the future demand for the retailer, which helps to reduce demand uncertainty. This paper studies the retailer’s optimal advance selling price and production quantity in a two-period model where the demand uncertainty comes from both the market size and the distribution of consumer valuations. We characterize the conditions under which the retailer adopts advance selling and perform comparative statics analysis of the equilibrium.
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