Optimal Pre-order Discount and Information Release

In this paper, we investigate the information release and pricing strategies for a seller who can take customer pre-orders before the release of a product. The pre-order option enables the seller to sell a product at an early date when consumers’ valuations are relatively homogeneous. We find that the optimal pricing strategy is discontinuous with respect to the amount of information available at pre-order, and a small change in the amount of information may cause a dramatic change in the proportion of consumers who pre-order under the optimal pricing strategy. Furthermore, the seller’s optimal information release strategy depends on a key measure, the normalized margin, which is the ratio between the expected margin and the standard deviation of consumer valuations. While the seller may want to release some (or zero) amount of information, depending on the normalized margin, the seller should never release all information. Finally, under the optimal information release strategy and pricing strategy, the benefit of pre-order is most pronounced when the seller can successfully position the product as a “mass-market” product by withholding information.