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Structural Estimation of the Effect of Out-of-Stocks

Author

Listed:
  • Andrés Musalem

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Marcelo Olivares

    () (Decision, Risk and Operations Division, Columbia Business School, Columbia University, New York, New York 10027)

  • Eric T. Bradlow

    () (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Christian Terwiesch

    () (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Daniel Corsten

    () (Operations and Technology Management, IE Business School, 28006 Madrid, Spain)

Abstract

We develop a structural demand model that endogenously captures the effect of out-of-stocks on customer choice by simulating a time-varying set of available alternatives. Our estimation method uses store-level data on sales and partial information on product availability. Our model allows for flexible substitution patterns, which are based on utility maximization principles and can accommodate categorical and continuous product characteristics. The methodology can be applied to data from multiple markets and in categories with a relatively large number of alternatives, slow-moving products, and frequent out-of-stocks (unlike many existing approaches). In addition, we illustrate how the model can be used to assist the decisions of a store manager in two ways. First, we show how to quantify the lost sales induced by out-of-stock products. Second, we provide insights on the financial consequences of out-of-stocks and suggest price promotion policies that can be used to help mitigate their negative economic impact, which run counter to simple commonly used heuristics.

Suggested Citation

  • Andrés Musalem & Marcelo Olivares & Eric T. Bradlow & Christian Terwiesch & Daniel Corsten, 2010. "Structural Estimation of the Effect of Out-of-Stocks," Management Science, INFORMS, vol. 56(7), pages 1180-1197, July.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:7:p:1180-1197
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1170
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alexandar Grubor & Nikola Milićević & Nenad Djokic, 2016. "The Effect of Inventory Level on Product Availability and Sale," Prague Economic Papers, University of Economics, Prague, vol. 2016(2), pages 221-233.
    2. 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.
    3. repec:eee:ejores:v:266:y:2018:i:1:p:99-111 is not listed on IDEAS
    4. Loy, Jens-Peter & Weiss, Christoph R. & Glauben, Thomas, 2016. "Asymmetric cost pass-through? Empirical evidence on the role of market power, search and menu costs," Journal of Economic Behavior & Organization, Elsevier, vol. 123(C), pages 184-192.
    5. Gad Allon & Awi Federgruen & Margaret Pierson, 2011. "How Much Is a Reduction of Your Customers' Wait Worth? An Empirical Study of the Fast-Food Drive-Thru Industry Based on Structural Estimation Methods," Manufacturing & Service Operations Management, INFORMS, vol. 13(4), pages 489-507, October.
    6. repec:bla:stratm:v:38:y:2017:i:5:p:1134-1150 is not listed on IDEAS
    7. repec:bla:stratm:v:38:y:2017:i:8:p:1569-1587 is not listed on IDEAS
    8. Carl F. Mela, 2011. "Structural Workshop Paper --Data Selection and Procurement," Marketing Science, INFORMS, vol. 30(6), pages 965-976, November.
    9. Gonca P. Soysal & Lakshman Krishnamurthi, 2012. "Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis," Marketing Science, INFORMS, vol. 31(2), pages 293-316, March.

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