Creating Sales with Stock-Outs

Abstract

Stock-outs convey information about the propensity of other consumers to purchase a product and this can increase the willingness of marginally interested consumers to buy. But in order to leverage stock-outs, firms must be able to capture the extra demand. We show how asymmetric inventory allocations to ex ante identical retailers may increase the expected satisfied demand compared to symmetric inventory allocations; when one retailer stocks out, the other retailer faces increased demand, not only due to overflow demand, but also due to an increase in the residual demand triggered by the stock-out information. In short, stock-outs can trigger herding behavior. Taking consumer reactions to stock-outs into account may lead to higher inventory investment (to capture the 'herd') and asymmetric inventory allocation (one retailer is 'sacrificed' to trigger the herd) for high margin products with a low prior on the quality (i.e. 'brand perception'). In other cases, accounting for consumer reactions to stock-outs can lead to lower investment in inventory.

Keywords: News vendor problem, herding, strategic consumer behavior

JEL Classification: M11, C72, D71, D83