Information acquisition, selling effort and pre-order strategy

We study a firm's joint decision on pre-order strategy and information acquisition in the principal-agent framework. The firm may hire a sales agent to promote the pre-order opportunity and/or to boost spot demand. The market signal gleaned from the pre-order outcome is reported to the firm to refine the demand forecast. Considering the compensation contract design problem, we show that the interests of the firm and the sales agent can be aligned by the classical menu of linear contracts (MLC) mechanism. Comparing the performance of the models with one or both of the adverse selection and moral hazard problems, we find that the pre-order strategy dominates the traditional strategy without pre-ordering. The comparison results also show that under the pre-order strategy, a combination of the pre-selling and regular selling efforts may be outperformed by the pre-selling effort only.