Working Paper No. 09-11

Advanced-Purchase Premiums versus Discounts in the Presence of Capacity Constraints
Samuel Raisanen
November 2009

ABSTRACT

When examining the pricing behavior of airlines, concerts, and sports tickets one observes that in some cases advanced sales are made at a discount while other times a premium is charged. While these markets are all characterized by advanced sales and capacity constraints, the firms advanced pricing strategies differ. This paper first develops a simple example where charging an advanced-purchase premium is optimal. Then examines when an advance-purchase discount is optimal versus when a premium can be charged for advanced-purchases. Discounts will tend to prevail when most customers are uncertain as to their future preferences. Premiums will be charged when most consumers know their preferred good in advance.

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