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Where to Cut the Long Tail? The Value of Carrying Inventory in Online Retail

Author

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  • Christoph Baldauf

    (Stockholm Business School, Stockholm University, 114 19 Stockholm, Sweden)

  • Fredrik Eng-Larsson

    (Stockholm Business School, Stockholm University, 114 19 Stockholm, Sweden)

  • Olov Isaksson

    (Stockholm Business School, Stockholm University, 114 19 Stockholm, Sweden)

Abstract

One advantage of online retail is that a large number of products can be displayed at low cost. However, online retailers must decide which of these products to carry in inventory (stock items) and which to order from suppliers when a customer places an order (nonstock items). In this paper, we empirically investigate how carrying a product in inventory affects its online sales. We use data from a European furniture and interior design retailer consisting of daily sales transactions and inventory data covering 18 months. We use a quasi-natural experiment—random transitions of products in and out of inventory at the retailer’s central warehouse—to estimate the causal effect of carrying inventory on sales. Our results show a strong and statistically significant increase in sales of, on average, 65% associated with having the product available in stock. More interestingly, this effect differs between products and is moderated by the price of the product: sales of more expensive products are less sensitive to the product being in stock. We use these results to draw insights on which types of items to carry in inventory.

Suggested Citation

  • Christoph Baldauf & Fredrik Eng-Larsson & Olov Isaksson, 2024. "Where to Cut the Long Tail? The Value of Carrying Inventory in Online Retail," Management Science, INFORMS, vol. 70(3), pages 1855-1874, March.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1855-1874
    DOI: 10.1287/mnsc.2023.4777
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