Pre-Order Price Guarantee in e-Commerce

With the development of the Internet and E-commerce, retailers often offer pre-orders for new to-be-released products. To encourage pre-orders, retailers such as Amazon offer pre-order price guarantee (PG). That is, if the product price drops before or on the release date, pre-order consumers automatically receive a refund for the difference between the pre-order price and the new price. We find that whether or not the retailer should offer pre-order PG depends on two factors: the fraction of high-valuation consumers and the pre-order demand uncertainty. Specifically, the retailer should not offer PG if and only if both the fraction of high-valuation consumers and the pre-order demand uncertainty are sufficiently small. In addition, we show that price commitment is dominated by dynamic pricing when the retailer can optimally decide whether or not to offer PG under dynamic pricing. Furthermore, we demonstrate that a retailer should sell in advance, with or without PG, if the marginal cost is less than a certain threshold, which is higher than the traditional threshold in advance selling literature without consideration of PG