Advance Selling in the Wake of Entry*

Abstract

This article provides a tractable model of inter-temporal price-discrimination by heterogeneous firms, imperative for our understanding of advance purchase markets in the wake of entry. The pricing schedule of an industry leader, whose product is more likely to match consumers' preferences, differs systematically from a newcomer's pricing. By diverting competition to a stage where consumers face uncertainty about their preferences, advance selling reduces prices while increasing the newcomer's market share and profitability relative to the industry leader. Policies curtailing firms' ability to sell in advance, although potentially beneficial for welfare, may consolidate an industry leader's position and reduce consumers' surplus.