Optimal Early-Bird Discounts and the Challenges of Diversion

Abstract

Variable pricing and early-bird discounts can shift some demandor the time of purchase from higher-priced periods to lower-priced periods without increasing the total demand. This diversioneffect influences optimal price levels, and the present paperpresents a model for calculating optimal early-bird discountswhen incorporating diversion. The model also reveals the differences in price elasticities and the feasible price interval for positiveprofit. The paper contributes to the literature on early-bird pricingstrategies and offers practical insights for service providers seek-ing to optimize their pricing strategies. The empirical relevance isdocumented using survey and real-life experimental data amongskiers at a major ski resort in Norway. The main insights of thepaper are that the profit-maximizing discounts and the gapbetween the optimal price with and without diversion increasewith the length of the pre-booking period.

Optimal Early-Bird Discounts and the Challenges of Diversion