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Advance selling to ease financial distress

Subject

Management Science and Operations

Publishing details

Social Sciences Research Network

Authors / Editors

Papanastasiou Y; Xiao S; Yang S A

Biographies

Publication Year

2020

Abstract

Left unable to provide service during the ongoing pandemic, many small businesses have experimented with alternative ways of generating income. One approach that has gained traction is the use of advance selling, whereby the firm asks consumers in its local community to support the business by paying in advance for consumption at a future date. In this paper, we develop a game theoretic model to investigate whether and how advance selling campaigns can be successfully implemented by firms facing financial distress. In cases of high distress (i.e., where obtaining bank financing is infeasible given the firm's financial need), we show that advance selling in its classic form may help the firm secure its survival in some scenarios, albeit barely and without generating any profit. We demonstrate that two modifications of the classic approach---namely, (i) the introduction of an "all-or-nothing" clause, or (ii) selling future discount coupons as opposed to the full service---can potentially expand the set of scenarios in which survival is ensured, while also allowing the firm to extract some positive profit. In cases of moderate financial distress (i.e., where bank financing is a feasible but inefficient option), we show that simple advance selling campaigns fail to make an impact. However, we find that a more complex implementation, combining both of the aforementioned modifications simultaneously, can be used in conjunction with bank financing to generate a substantial improvement in firm profit.

Keywords

Advance selling; Operations management; OM-Finance interface; Strategic consumers; Moral hazard

Series Number

3756746

Series

Social Sciences Research Network