Behavioral Demand Effects When Buyers Anticipate Inventory Shortages

52 Pages Posted: 20 Mar 2015 Last revised: 17 Aug 2019

See all articles by Joshua Foster

Joshua Foster

University of Wisconsin - Oshkosh

Cary A. Deck

University of Alabama - Department of Economics, Finance and Legal Studies

Amy Farmer

University of Arkansas - Department of Economics

Date Written: March 8, 2015

Abstract

Firms often worry about how buyers will react when there is an inventory shortage, but the anticipation of facing a shortage may also impact buyer behavior. In this paper we use a combination of theoretical modeling, computational methods, and laboratory experiments to understand buyers’ search behavior in markets where there is potential for either a costly or costless inventory shortage. When inventory shortages are costly to buyers we find their equilibrium purchasing strategy generates a newsvendoresque problem among the firms. In turn, experimental data suggests buyer behavior can be explained by prospect theory better than by standard assumptions of fully rational expected utility maximizing agents, indicating that potential inventory shortages generate loss aversion among buyers, and there is systematic mis-identification of the probability with which they will be able to procure an item. Using computational methods, we find firms are able to extract more surplus from behavioral buyers via higher prices than would be predicted by the standard model. On the other hand, when inventory shortages are not costly to buyers the effect of behavioral biases on the part of buyers is not relevant. But in this case there can be a benefit to reducing inventory via a reduction in price competition.

Keywords: Inventory, Retailing, Simulation, Behavioural OR

JEL Classification: D40, G31, L15, C91

Suggested Citation

Foster, Joshua and Deck, Cary A. and Farmer, Amy, Behavioral Demand Effects When Buyers Anticipate Inventory Shortages (March 8, 2015). Available at SSRN: https://ssrn.com/abstract=2580534 or http://dx.doi.org/10.2139/ssrn.2580534

Joshua Foster (Contact Author)

University of Wisconsin - Oshkosh ( email )

800 Algoma Blvd.
Oshkosh, WI 54901
United States

Cary A. Deck

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Amy Farmer

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
501-575-6093 (Phone)
501-575-3241 (Fax)

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