Let Them Stay or Let Them Go? Online Retailer Pricing Strategy for Managing Stockouts

51 Pages Posted: 19 Jun 2020

See all articles by James A. Dearden

James A. Dearden

Lehigh University

Yuliang Oliver Yao

Lehigh University

Xingyue Luna Zhang

University of Washington Tacoma

Date Written: May 26, 2020

Abstract

A challenge for online retail firms is managing stockouts when substitute products are available. Firms have options to set prices or offer substitute products to retain or release the consumers following stockouts. We develop a game-theoretic model in which competing online firms face the decision whether to price low enough so that, following product stockouts, their consumers remain in their stores by turning to unfamiliar substitute products that are in stock or even to attract their competitor’s consumers following stockouts at their competitor, or price high enough to release the consumers to the competitor. We demonstrate that our model’s unique equilibrium is one of three types: retain-consumer, release-consumer, or all-firm-i-consumer. Our analyses of the equilibria show that firms have the opportunity to use prices as a stockout recovery mechanisms, but surprisingly, they may choose not to do so under certain circumstances, dependent on the consumer search costs of unfamiliar substitute products on their sites.

Keywords: Online Retailer, Pricing Strategy, Stockout

Suggested Citation

Dearden, James A. and Yao, Yuliang and Zhang, Xingyue, Let Them Stay or Let Them Go? Online Retailer Pricing Strategy for Managing Stockouts (May 26, 2020). Available at SSRN: https://ssrn.com/abstract=3611193 or http://dx.doi.org/10.2139/ssrn.3611193

James A. Dearden

Lehigh University ( email )

621 Taylor Street
Department of Economics
Bethlehem, PA 18015
United States

Yuliang Yao

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Xingyue Zhang (Contact Author)

University of Washington Tacoma ( email )

1900 Commerce St
Tacoma, WA 18015
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
14
Abstract Views
154
PlumX Metrics