Creating Sales with Stock-Outs

54 Pages Posted: 7 Jul 2009 Last revised: 30 Aug 2011

See all articles by Laurens Debo

Laurens Debo

Dartmouth College - Tuck School of Business

Garrett van Ryzin

Cornell Tech; Lyft, Inc.

Date Written: July 4, 2009

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

Suggested Citation

Debo, Laurens and van Ryzin, Garrett, Creating Sales with Stock-Outs (July 4, 2009). Chicago Booth Research Paper No. 09-25. Available at SSRN: https://ssrn.com/abstract=1430979 or http://dx.doi.org/10.2139/ssrn.1430979

Laurens Debo (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Garrett Van Ryzin

Cornell Tech ( email )

2 W Loop Rd
New York, NY 10044
United States

Lyft, Inc. ( email )

San Francisco, CA

Register to save articles to
your library

Register

Paper statistics

Downloads
167
Abstract Views
926
rank
178,663
PlumX Metrics