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Gaining More by Stocking Less: A Competitive Analysis of Product Availability

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Author Info

  • Subramanian Balachander

    (Clark University)

  • Peter H. Farquhar

    (The Claremont Graduate School)

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    Abstract

    The price competition between two firms can affect their decisions about product availability. With occasional stockouts a firm loses from foregone sales, yet it may indirectly benefit from the higher price a competitor is able to charge. The more prone customers are to search elsewhere for the product upon encountering a stockout, the greater is the gain from the reduced price competition between firms. This paper establishes conditions whereby the strategic interaction of reduced price competition between firms outweighs the loss from foregone sales. In such cases, a firm can increase its expected profits by choosing to stock less. These results provide a competitive rationale for the high stockout levels observed in some retail situations and have implications for the analysis of product availability in public policy settings.

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    File URL: http://dx.doi.org/10.1287/mksc.13.1.3
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 13 (1994)
    Issue (Month): 1 ()
    Pages: 3-22

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    Handle: RePEc:inm:ormksc:v:13:y:1994:i:1:p:3-22

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    Related research

    Keywords: competitive strategy; pricing research; product policy;

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    Cited by:
    1. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2008. "The Effects of Capacity on Sales Under Alternative Vertical Contracts," NBER Working Papers 14611, National Bureau of Economic Research, Inc.
    2. Bayle-Tourtoulou, Anne-Sophie & Laurent, Gilles & Macé, Sandrine, 2006. "Assesing the frequency and clauses of out-of-stock events through store scanner data," Les Cahiers de Recherche 830, HEC Paris.
    3. Blazenko, George W. & Vandezande, Kirk, 2003. "Corporate holding of finished goods inventories," Journal of Economics and Business, Elsevier, vol. 55(3), pages 255-266.
    4. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.

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