Advance selling in the presence of valuation uncertainty and demand correlation

We consider a problem where a seller presells a product and the demands in the advance and spot periods are stochastic and correlated. There are two types of consumers, informed and uninformed consumers, in the market, depending on their arrival time. Informed consumers who arrive in the advance period are uncertain about their valuation of the product, and the uncertainty will be resolved until the spot period. Considering the correlation between the two types of consumers, by offering a proper advance strategy, the seller can use the advance order information to update his forecast for the spot-period demand and make better inventory decisions accordingly. In this paper, we consider two preorder strategies: the preorder strategy with a price guarantee and the one without a price guarantee. We investigate the seller's optimal advance and spot pricing decisions under the two strategies and investigate the impact of consumers’ valuation uncertainty on the seller's decisions. We also conduct numerical experiments to show that the seller should offer a price guarantee when the informed demand uncertainty is large.