Advance selling under deposit expansion and consumer’s valuation change

Motivated by the emerging practices of China's major e-commerce platforms, we investigate the effect of consumer’s valuation change, deposit expansion and return policy on retailer’s advance booking decisions. We establish the retailer’s expected profit based on a two-stage newsvendor model and derive his optimal deposit and order quantity decisions under different scenarios. Our conclusions show that: (1) the retailer gains further profit under the advance selling strategy with a deposit, due to the reduction of inventory risk and exploitation of consumer’s valuation uncertainty; (2) the retailer benefits more from advance selling when he has a lower profit margin or the consumers have low-level prior valuations; (3) the effectiveness of advance selling on exploiting consumer’s valuation uncertainty will be weakened if the retailer allows customers to return products; (4) a lower deposit expansion rate leads to higher deposit and expected profit.