Referral, Learning and Inventory Decisions

61 Pages Posted: 16 Nov 2018 Last revised: 7 Dec 2022

See all articles by Guangwen Kong

Guangwen Kong

Temple University-Fox School of Business

Ankur Mani

University of Minnesota - Twin Cities - Industrial and Systems Engineering

Yuanchen Su

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: February 19, 2021

Abstract

With the proliferation of digital social networks, businesses increasingly use referral programs to increase market exposure and sales. When customers refer a product to others they naturally disclose their purchase decisions. Thus the referral process introduces a social learning effect. We study the interaction between social learning and referral program structure and examine their impact on a firm's inventory decisions. We find that the presence of customers who lack knowledge of their own preferences introduces demand bias but social learning reduces this bias at the expense of increased demand variance. We characterize the optimal inventory levels for different numbers of referrals allowed by the firm and find that it is governed by the combination of \emph{market exposure effect} and \emph{demand substitution effect}. In a single referral program, the stock-out of one product can diminish the demand of the other product. In contrast, a multiple referral program allows a firm to achieve full market exposure but meanwhile increases the demand variance. Hence, the optimal referral program has to balance the trade-off between market exposure and demand variance, and thus allows either one or two referrals per customer.

Keywords: referral program, social learning, inventory management

Suggested Citation

Kong, Guangwen and Mani, Ankur and Su, Yuanchen, Referral, Learning and Inventory Decisions (February 19, 2021). NET Institute Working Paper No. 18-15, Available at SSRN: https://ssrn.com/abstract=3267076 or http://dx.doi.org/10.2139/ssrn.3267076

Guangwen Kong (Contact Author)

Temple University-Fox School of Business ( email )

531 Alter Hall
1801 Liacouras Walk
Philadephia, PA 19122
United States
19122 (Fax)

HOME PAGE: http://https://www.fox.temple.edu/about-fox/directory/guangwen-kong/

Ankur Mani

University of Minnesota - Twin Cities - Industrial and Systems Engineering ( email )

111 Church St SE
Minneapolis, MN 55455
United States

Yuanchen Su

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
6126156389 (Phone)

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