Intertemporal Pricing with Resellers: An Empirical Study of Product Drops

Abstract

Product drops occur when a retailer releases a limited-edition product line on a specific date for a short period of time. Due to limited inventory of the product and the short sales horizon, a resale market emerges where products may resell at higher prices once the firm stocks out. The firm faces a central trade-off: pricing too high may lead to a longer stock-out time and future markdowns; pricing too low may lead to lost revenue with large markups in the resale market. Any firm in this position may ask, "How do resellers impact my profit?" To answer this question we build a dynamic structural model that can be used as a framework for managers to estimate the preferences of consumers that engage in strategic behavior to resell as well as capture the business requirement to sell inventory in a timely fashion. We estimate our model using a unique data set from a retailer of baby clothing with weekly product drops, where customers engage in a resale marketplace through Facebook groups. We find that ignoring the resale market in pricing reduces firm profit by 8.1%.

Keywords: Retail, Structural Modeling, Dynamic Pricing, Resale Marketplaces, Product Drops