Impact of consumer foresight on efficient overselling

Abstract

Abstract Overselling is commonly adopted in the travel and hospitality sectors where a good or service is sold in excess of actual supply. We examine the impact of consumer foresight on efficient overselling when there are two dimensions of uncertainty, namely, early consumers are uncertain about their service valuations and the seller is uncertain about late demand arrival. We show that when consumers are naïve and have no foresight to anticipate future events, the seller resorts to the use of partial refunds and involuntary cancellation when the mandatory compensation for seller‐initiated cancellation is low, resulting in efficiency loss. When consumers are sophisticated and have perfect foresight on future events, efficiency is achieved when the seller sells the entire capacity in advance and relies solely on voluntary cancellation to re‐sell units when late demand warrants it. Refund complements overselling both by improving allocation efficiency in involuntary cancellation and by mitigating the cost of overselling when consumers have limited foresight. Unlike the social planner, the seller may suffer from consumer foresight. Our findings pinpoint the mandatory compensation in involuntary cancellation as a strategic tool for the social planner to tilt the seller's preference in the seller‐initiated cancellation policy to achieve efficient overselling.