Pricing Capacity and Recourse Strategies: Facilitate Reselling, Offer Refunds, or Overbook?

Abstract Perishable capacity is often sold before it is used (e.g., tickets sold weeks before a sporting event) which creates the opportunity to include in the pricing mechanism a recourse strategy, i.e., allowing the firm or buyer to change ownership after an initial transaction. For example, a buyer could be allowed to resell the purchased unit to another buyer (e.g., a ticket exchange), or the firm could offer to refund the buyer if the buyer prefers to relinquish the unit (which is equivalent to selling an option to the buyer), or the firm could overbook, i.e., sell its capacity twice, possibly denying service to the first buyer (e.g., common practice among airlines). Recourse mechanisms tend to be controversial, both in terms of whether sellers should support them and how they impact buyer welfare. We find that recourse strategies are able to substantially increase the firm's profit and can at the same time increase buyer welfare. In fact, selling in advance may be a sub-optimal strategy without some form of recourse, especially in situations with ample demand relative to capacity. Among all selling mechanisms, reselling is optimal, but overbooking can be nearly as effective. Reselling is preferred even though consumers are able to sell for more than they paid. Consumer reselling also eliminates opportunities for speculators. We conclude that a firm selling capacity in advance should generally adopt some recourse strategy.