Xianjun Geng, Ruhai Wu, & Andrew B. Whinston
Executive Summary
Marketing scholars and practitioners are in constant search of new price discrimination mechanisms that can enhance a seller’s profitability. This article proposes one such new mechanism: the strategic control and use of resale markets. The authors discuss resale in the context of a seller that markets perishable products with a fixed consumption time, such as tickets for entertainment events. The seller sells products in two periods: in advance and on spot. Accordingly, buyers arrive in both periods, and resale among buyers may happen in both periods.
The traditional approach in dealing with resale is either to allow it entirely or to ban it entirely. This research focuses on a third possibility: partial resale, under which spot resale is banned yet advance resale is still allowed. For example, this is the case when consumers conduct advance resale mainly online and spot resale mainly offline and when the offline channel is heavily restricted whereas the online channel is not.
The authors show that partial resale offers the seller a new price discrimination mechanism that is unavailable under complete ban of resale. Partial resale enables the seller to discriminate all or most high-valuation buyers regardless of their arrival time. In contrast, completely banning resale implies that the seller discriminates buyers on the basis of their arrival time.
The authors further identify the conditions under which discriminating high-valuation buyers benefits the seller more than discriminating early buyers does (and thus the seller should adopt partial resale). First, supply should be smaller than total market demand. Second, the number of high-valuation buyers should not be large. Together, these two conditions ensure that the seller will prefer a higher advance price than the spot price. A higher advance price is important because, otherwise, partial resale offers early buyers an arbitrage opportunity because they can buy low and sell high, which reduces the seller’s spot demand. Third, the number of early arrivers should not be too large. Otherwise, the seller will be better off completely banning resale and discriminating early arrivers only.
For a seller that adopts partial resale, this research offers several pricing suggestions. First, to induce early arrivers to buy in advance directly from the seller rather than to wait for the resale market, the seller should ration ticket supply in the advance period to create supply scarcity in the advance resale market. Second, as mentioned previously, the seller should set an advance price higher than the spot price. Finally, the advance price the seller sets under partial resale should be higher than that under complete ban of resale because under partial resale, an early buyer has the option to resell her ticket, which in turn increases his or her willingness to pay.
Although the focus of this research is on seller profitability, the authors also show that compared with no resale, partial resale never hurts and often increases consumer benefit. In other words, partial resale can be a win–win solution for both sellers and buyers.
Biography
Xianjun Geng is Assistant Professor in Information Systems at the University of Washington. He received his Bachelor of Engineering, Bachelor of Economics, and Master of Engineering from Tsinghua University, Beijing, and his PhD in Information Systems from the University of Texas at Austin. His research interests include the economics of e-business, strategic information distortion and trust, and new information technology and systems. His work has appeared in academic journals, including Management Science, Marketing Science, MIS Quarterly, Journal of Management Information Systems, International Journal of Electronic Commerce, ACM Transactions on Internet Technology, IEEE Computer, and IEEE IT Professional. At University of Washington, he has won the Lex N. Gamble Family Award for Excellence in the Field of E-Commerce (2005) for his research and Undergraduate Instructor of the Quarter (Autumn 2005) for his teaching.
Ruhai Wu is Visiting Assistant Professor of Economics in the College of Business at Florida Atlantic University. He received his master’s degree in Finance from Tsinghua University, Beijing, and his PhD in Economics from the University of Texas at Austin. His research focuses on electronic commerce, price discrimination, and resale markets.
Andrew B. Whinston is Hugh Cullen Chair Professor in the Information, Risk, and Operations Management Department at the McCombs School of Business at the University of Texas at Austin. He is also the director at the Center for Research in Electronic Commerce. His recent research has been published in Marketing Science, Management Science, and Journal of Economic Theory. In total, he has published more than 300 articles in the major economic and management journals and has authored 25 books. In 2005, he received the Leo Award from the Association for Information Systems for his long-term research contribution to the information system field. He has cofounded several companies, including Combinatorics and Micro Data Base System and has served as a director of Code Toys.
Journal of Marketing, Vol. 71, No. 2, April 2007
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