Optimal trade-in strategy for advance selling with strategic consumers proportion

Abstract

PurposeThis study aimed to optimize the trade-in pricing strategy. To leverage market share, many sellers adopt trade-in strategy for advance selling, Customers can return their old products at a discount price when they buy new products. This can help increase the market share and decrease natural resource consumption.Design/Methodology/ApproachWe consider a seller who sells new-generation products over two periods: advance selling and regular selling. Based on the rational expectation equilibrium, we adopt dynamic programming to construct a two-period pricing model with three different trade-in strategies–only in period 2, in both periods, and not at all–explaining the trade-in strategy as a promotion tool used by a monopolist to discriminate for advance selling between new and old customers.FindingsThe results suggest that the optimal price is determined by the proportion of old customers, discount factor and product innovation level. Whether and when to give a trade-in rebate to old customers depends on these parameters. The seller’s choice of optimal trade-in strategy depends on the threshold value of the new customer demand and trade-in demand.Originality/ValueMost existing literature focuses on advance selling strategies and trade-in strategies. To the best of our knowledge, this is a pioneering study that adopts trade-in as part of the advance selling strategy.