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

Author

Listed:
  • Subramanian Balachander

    (Clark University)

  • Peter H. Farquhar

    (The Claremont Graduate School)

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.

Suggested Citation

  • Subramanian Balachander & Peter H. Farquhar, 1994. "Gaining More by Stocking Less: A Competitive Analysis of Product Availability," Marketing Science, INFORMS, vol. 13(1), pages 3-22.
  • Handle: RePEc:inm:ormksc:v:13:y:1994:i:1:p:3-22
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    File URL: http://dx.doi.org/10.1287/mksc.13.1.3
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    References listed on IDEAS

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    6. John R. Hauser, 1977. "Testing the Accuracy," Discussion Papers 286, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Gérard P. Cachon & Martin A. Lariviere, 1999. "Capacity Allocation Using Past Sales: When to Turn-and-Earn," Management Science, INFORMS, pages 685-703.
    2. Ravi Anupindi & Maqbool Dada & Sachin Gupta, 1998. "Estimation of Consumer Demand with Stock-Out Based Substitution: An Application to Vending Machine Products," Marketing Science, INFORMS, pages 406-423.
    3. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2011. "The Effects Of Capacity On Sales Under Alternative Vertical Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 117-154, March.
    4. James D. Hess & Eitan Gerstner, 1998. "Yes, “Bait and Switch” Really Benefits Consumers," Marketing Science, INFORMS, pages 283-289.
    5. Aydinliyim, Tolga & Pangburn, Michael S. & Rabinovich, Elliot, 2017. "Inventory disclosure in online retailing," European Journal of Operational Research, Elsevier, vol. 261(1), pages 195-204.
    6. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, pages 709-733.
    7. Xuanming Su & Fuqiang Zhang, 2009. "On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers," Management Science, INFORMS, pages 713-726.
    8. Blazenko, George W. & Vandezande, Kirk, 2003. "Corporate holding of finished goods inventories," Journal of Economics and Business, Elsevier, pages 255-266.
    9. Yuxin Chen & James D. Hess & Ronald T. Wilcox & Z. John Zhang, 1999. "Accounting Profits Versus Marketing Profits: A Relevant Metric for Category Management," Marketing Science, INFORMS, pages 208-229.
    10. Ayd{i}n Alptekinou{g}lu & Charles J. Corbett, 2008. "Mass Customization vs. Mass Production: Variety and Price Competition," Manufacturing & Service Operations Management, INFORMS, pages 204-217.
    11. Chiang, Wei-yu Kevin, 2010. "Product availability in competitive and cooperative dual-channel distribution with stock-out based substitution," European Journal of Operational Research, Elsevier, vol. 200(1), pages 111-126, January.
    12. Marcelo Olivares & Gérard P. Cachon, 2009. "Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets," Management Science, INFORMS, pages 1586-1604.
    13. Eitan Gerstner & Barak Libai, 2006. "—Why Does Poor Service Prevail?," Marketing Science, INFORMS, pages 601-603.
    14. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, pages 709-733.
    15. 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.

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