Advanced sale of service capacities: a theoretical analysis of the impact of price sensitivity on pricing and capacity allocations

Abstract

Should service firms sell in advance? Using a theoretical approach, we study the optimality of advanced sale of capacity for a monopolistic service firm and examine the impact of market price sensitivity on the optimal price and capacity allocations for advanced sale. We show that when firms undertake advanced sale, capacity utilization and profits are higher even though prices for sale in advance are discounted. In addition, we show that optimal pricing and capacity allocations for advanced sale depend on the expected price sensitivity at the time of consumption. When price sensitivity at the point of consumption is expected to be low (unchanged), it is optimal to allocate more (less) capacity for sale at time of consumption than in advance. Although optimal price and capacity allocations in advanced sale result in excess capacity, we show that having excess capacity is a strategic decision in that it is a dominant strategy.