Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets

Management Science, Vol. 55, No. 9, pp. 1586-1604, 2009

Columbia Business School Research Paper

19 Pages Posted: 20 Oct 2011

See all articles by Marcelo Olivares

Marcelo Olivares

University of Chile; University of Chile - Engineering Department

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department

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Date Written: September 10, 2009

Abstract

We study the following question: How does competition influence the inventory holdings of General Motors' dealerships operating in isolated U.S. markets? We wish to disentangle two mechanisms by which local competition influences a dealer's inventory: (1) the entry or exit of a competitor can change a retailer's demand (a sales effect); and (2) the entry or exit of a competitor can change the amount of buffer stock a retailer holds, which influences the probability that a consumer finds a desired product in stock (a service-level effect). Theory is clear on the sales effect—an increase in sales leads to an increase in inventory (albeit a less than proportional increase). However, theoretical models of inventory competition are ambiguous on the expected sign of the service-level effect. Via a Web crawler, we obtained data on inventory and sales for more than 200 dealerships over a six-month period. Using cross-sectional variation, we estimated the effect of the number and type of local competitors on inventory holdings. We used several instrumental variables to control for the endogeneity of market entry decisions. Our results suggest that the service-level effect is strong, nonlinear, and positive. Hence, we observe that dealers carry more inventory (controlling for sales) when they face additional competition.

Suggested Citation

Olivares, Marcelo and Cachon, Gerard P, Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets (September 10, 2009). Management Science, Vol. 55, No. 9, pp. 1586-1604, 2009 ; Columbia Business School Research Paper . Available at SSRN: https://ssrn.com/abstract=1946447

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

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department ( email )

Philadelphia, PA 19104
United States

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