Partial Refunds as a Strategic Price Commitment Device in Advance Selling in a Service Industry

Abstract Over the past decade, consumers’ strategic waiting behavior in anticipation of a price markdown has become increasingly common when advance selling is used. Recently, studies in the durable goods industry show that a partial refund strategy can activate the price-commitment mechanism to counter consumers’ strategic waiting, which is primarily driven by both consumers’ and retailers’ behaviors that discount the future. In this research, we investigate the possibility of using this partial refund strategy in a service industry context in which demand uncertainty and consumption state uncertainty act as major influential factors. We study analytical models that consider the demand uncertainty of later arrivals and the consumption state uncertainty of early arrivals over two selling periods (advance and spot selling). Our results show a consistent pattern reflecting that a partial refund strategy in which the cancellation fee acts as a price-commitment mechanism is capable of emerging as the optimal strategy. Other than the strategic commitment mechanism, the cancellation fee paid by the advance buyers who choose to cancel their advance purchase also plays a profit-enhancer role. Combining these two mechanisms, a partial refund strategy dominates both a price-matching strategy and a dynamic pricing strategy, and they are only special cases of that type of strategy. Finally, comparative statistical analyses are conducted and reveal the impacts of demand-related parameters on the optimality of the partial refund strategy. These results provide instructive guidance for sellers when utilizing the partial refund strategy in their marketing practices.