Effects of Consumer Stockpiling on Strategic Inventory with Buy-One-Get-One Promotions

Abstract

Strategic inventory held by a retailer has been acknowledged for its potential to benefit the entire supply chain. However, it’s important to recognize that strategic inventory might not always be advantageous for the retailer. Additionally, a significant portion of consumers engage in product stockpiling, driven by factors like price promotions, their anticipations regarding future purchases and consumptions, among others. This behavior generates a significant temporal demand shift, influencing decisions related to the retailer’s strategic inventory. Notably, retailers are increasingly turning to quantity-based discounts, such as Buy-One-Get-One (BOGO), as opposed to unit-based discounts such as rebates and price reductions, to dynamically adjust their pricing and inventory strategies. In this study, we delve into the impact of consumer stockpiling on strategic inventory within a supply chain. This two-level inventory problem is particularly relevant when considering
consumer anticipations and BOGO promotions on products with stable comsumption rates, e.g., one shampoo bottle per month. Our findings reveal that consumer anticipations and BOGO can induce consumer stockpiling, consequently causing a shift in demand. Surprisingly, while consumer anticipations can lead to an increase in the retailer’s strategic inventory, BOGO can reduce it. This reduction is observed regardless of whether consumers anticipate future prices or not. Importantly, BOGO can increase profits for the retailer and the manufacturer, although it may come at the expense of reducing consumer surplus. Furthermore, our analysis uncovers a unique equilibrium, the ‘leapfrogging equilibrium,’ arising from the demand shift caused by stockpiling. Within this equilibrium, the retailer holds no strategic inventory, yet retains bargaining power to secure a lower wholesale price in the subsequent period. We extend our research by comparing BOGO with
rebates, highlighting significant disparities in their impact on supply chain pricing and inventory strategies. We also consider variations in the manufacturer’s production cost structures and expand our analysis to a multi-period model. Our results provide valuable insights into the design of pricing and promotion strategies aimed at reducing strategic inventory and managing consumer stockpiling.

Keywords: contracts, inventories, supply chains, BOGO, promotions

JEL Classification: C70, D4, M31