Abstract

http://ssrn.com/abstract=1010269
 
 

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On the Value of Commitment and Availability Guarantees when Selling to Strategic Consumers


Xuanming Su


University of Pennsylvania - Operations & Information Management Department

Fuqiang Zhang


Washington University in Saint Louis - John M. Olin Business School

July 1, 2008


Abstract:     
This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations (RE) equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex-ante, commits to a particular quantity), and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex-post, if the product is out of stock). Interestingly, the seller has an incentive to over-compensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity.

Number of Pages in PDF File: 40

Keywords: availability guarantee, commitment, product availability, search costs, stockouts, newsvendor, rational expectations

JEL Classification: D21, D83, D84, L20

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Date posted: August 28, 2007 ; Last revised: May 8, 2012

Suggested Citation

Su, Xuanming and Zhang, Fuqiang, On the Value of Commitment and Availability Guarantees when Selling to Strategic Consumers (July 1, 2008). Available at SSRN: http://ssrn.com/abstract=1010269 or http://dx.doi.org/10.2139/ssrn.1010269

Contact Information

Xuanming Su (Contact Author)
University of Pennsylvania - Operations & Information Management Department ( email )
Philadelphia, PA 19104
United States

Fuqiang Zhang
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/
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