Advance selling with freebies and limited production capacity

We consider a two-period pricing model in which a seller offers freebies along with the product when making advance sales, and production is constrained by capacity. The seller can offer freebies to increase both market base and customer's valuation toward the product in advance. The customers strategically determine whether to purchase the product in advance and gain freebies when their valuation on the product is uncertain, or delay their purchase decision until the regular selling period. We characterize the optimal pricing, quality level of the freebie and production quantity decisions that maximize the expected profits of the seller over the two periods. (C) 2016 Elsevier Ltd. All rights reserved.