Optimal Dynamic Allocation of Sales and Rental Inventory at a Retailer

41 Pages Posted: 31 Aug 2017 Last revised: 5 Oct 2018

See all articles by Mehmet Sekip Altug

Mehmet Sekip Altug

George Mason University

Oben Ceryan

Cass Business School, City, University of London

Date Written: September 27, 2018

Abstract

As renting becomes more popular among consumers, an increasing number of retailers, especially apparel retailers, are changing their business models to respond to this rising trend. Although some apparel retailers are known to be pure renters, more recently, we have seen retailers that simultaneously sell and rent the same products. We consider such a monopolist retailer that starts a season with a fixed amount of inventory and at every period faces uncertain demand that splits as renters and buyers based on their utility. A rented unit is brought back to the retailer and can only be re-rented. The retailer needs to dynamically allocate part of its inventory to rental customers while protecting the rest for sales. At any point in time, if the retailer protects too many units for sales, it might risk having too much excess inventory at the end of season, and that inventory could have been rented. On the other hand, if the retailer allocates too many units for rental, it risks turning away the more profitable sales customers. We characterize the optimal dynamic rental-allocation policy and discuss some of its interesting monotonicity properties. We provide an upper bound and show two simpler policies are asymptotically optimal. Based on the aforementioned trade-off, and drawing interesting parallels between our problem and the classic two-fare revenue management problem, we propose a marginal revenue heuristic and numerically show it performs very well. We extend our model to study the impact of competition on a retailer's strategy of selling and renting. We characterize the equilibrium allocation decisions and discuss the different types of equilibria that can emerge.

Keywords: Retailing, Operations/Marketing Interface, Renting

Suggested Citation

Altug, Mehmet Sekip and Ceryan, Oben, Optimal Dynamic Allocation of Sales and Rental Inventory at a Retailer (September 27, 2018). Available at SSRN: https://ssrn.com/abstract=3028780 or http://dx.doi.org/10.2139/ssrn.3028780

Mehmet Sekip Altug (Contact Author)

George Mason University ( email )

VA 22030
United States

Oben Ceryan

Cass Business School, City, University of London ( email )

London
United Kingdom

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