Intertemporal Pricing with Resellers: An Empirical Study of Product Drops

Product drops occur when a retailer releases a limited-edition product line on a specific date for a short period of time. Due to limited inventory of the product and the short sales horizon, a resale market emerges where products may resell at higher prices once the firm stocks out. The firm faces a central tradeoff: pricing too high may lead to a longer stockout time and future markdowns; pricing too low may lead to transfer of profits to resellers. Any firm in this position may ask, “How do resellers impact my profit?” To answer this question, we build a dynamic structural model that captures customer decisions to consume or strategically resell, as well as the firm’s intertemporal pricing decision in the presence of resellers. We estimate our model using a unique data set from a retailer of baby clothing with weekly product drops, where customers engage in a resale marketplace through Facebook groups. We find resale data collection and analysis is valuable to incorporate into pricing as firm profit increases by 8.8%, and reseller presence reduces firm profit by 5.8% even if resale data are used in pricing. These impacts are magnified by resale market growth, demonstrating that managers need to take action as resale markets gain wider adoption.