Structural Estimation of the Effect of Out-of-Stocks

Management Science, Vol. 56, No. 7, pp. 1180-1197, July 2010

Columbia Business School Research Paper No. 11-24

18 Pages Posted: 20 Oct 2011

See all articles by Marcelo Olivares

Marcelo Olivares

Columbia University - Columbia Business School - Decision Risk and Operations; University of Chile - Engineering Department

Eric Bradlow

University of Pennsylvania - Marketing Department

Christian Terwiesch

University of Pennsylvania - Operations & Information Management Department

Daniel Corsten

FundaciĆ³n Instituto de Empresa, S.L.

Date Written: July 1, 2010

Abstract

We develop a structural demand model that endogenously captures the effect of out-of-stocks on customer choice by simulating a time-varying set of available alternatives. 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 (unlike many existing approaches). In addition, we illustrate how the model can be used to assist the decisions of a store manager 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 price promotion policies that can be used to help mitigate their negative economic impact, which run counter to simple commonly used heuristics.

Suggested Citation

Olivares, Marcelo and Bradlow, Eric and Terwiesch, Christian and Corsten, Daniel, Structural Estimation of the Effect of Out-of-Stocks (July 1, 2010). Management Science, Vol. 56, No. 7, pp. 1180-1197, July 2010 ; Columbia Business School Research Paper No. 11-24. Available at SSRN: https://ssrn.com/abstract=1946424

Marcelo Olivares (Contact Author)

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

3022 Broadway
Uris Hall, #417
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~mo2338/index.htm

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

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Daniel Corsten

FundaciĆ³n Instituto de Empresa, S.L. ( email )

Serrano 99
Madrid, 28006
Spain

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