Structural Estimation of the Effect of Out-of-Stocks

47 Pages Posted: 11 Aug 2008 Last revised: 14 Aug 2011

See all articles by Andres Musalem

Andres Musalem

Universidad de Chile

Marcelo Olivares

University of Chile; University of Chile - Engineering Department

Eric Bradlow

University of Pennsylvania - Marketing Department

Christian Terwiesch

affiliation not provided to SSRN

Daniel Corsten

Fundación Instituto de Empresa, S.L.

Date Written: January 31, 2010

Abstract

We develop a structural demand model that captures the effect of out-of-stocks on customer choice. Our estimation method uses store-level data on sales and partial information on product availability. Our model allows for flexible substitution patterns which are based on utility maximization principles and can accommodate categorical and continuous product characteristics. The methodology can be applied to data from multiple markets and in categories with a relatively large number of alternatives, slow moving products and frequent out-of-stocks. We estimate our model using sales data from multiple stores for twenty four items in the shampoo product category. In addition, we illustrate how the model can be used to assist the decisions of a retailer in two ways.

First, we show how to quantify the lost sales induced by out-of-stock products. Second, we provide insights on the financial consequences of out-of-stocks and suggest simple policies that can be used to help mitigate the negative economic impact of out-of-stocks.

Keywords: choice models, retailing, out-of-stocks, inventory management, Bayesian methods, data augmentation, aggregate demand estimation

Suggested Citation

Musalem, Andres and Olivares, Marcelo and Bradlow, Eric and Terwiesch, Christian and Corsten, Daniel, Structural Estimation of the Effect of Out-of-Stocks (January 31, 2010). Available at SSRN: https://ssrn.com/abstract=1217281 or http://dx.doi.org/10.2139/ssrn.1217281

Andres Musalem

Universidad de Chile ( email )

Beauchef 851
Santiago
Chile

HOME PAGE: http://www.dii.uchile.cl/~amusalem

Marcelo Olivares (Contact Author)

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

University of Chile - Engineering Department ( email )

Republica 701 Santiago
Chile

Eric Bradlow

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States
215-898-8255 (Phone)

Christian Terwiesch

affiliation not provided to SSRN

Daniel Corsten

Fundación Instituto de Empresa, S.L. ( email )

Serrano 99
Madrid, 28006
Spain

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