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Demand Estimation with Unobserved Stockout Substitution: Exact Likelihood Maximization

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  • Chenhao Wang
  • Hansheng Jiang
  • Ningyuan Chen

Abstract

When a product is sold out, customers who prefer it may buy a substitute or leave without purchasing. Efficient demand estimation in this setting is challenging when inventory is observed only at replenishments, because the stockout times, and hence the products available to each customer, are unobserved. Estimating demand efficiently under stockout substitution has been a challenging problem since Anupindi et al. (1998), and it has become more pressing as the scale of such problem instances grows thanks to innovations in retailing such as unmanned stores. We provide a complete solution to this problem for the multinomial logit (MNL) model, the most widely used model of customer choice. Using a continuous-time representation of the purchase process developed in Zhou et al. (2026), we show that the exact likelihood and its gradient are one-dimensional integrals, no matter how many products, customers, or stockouts there are. Both can be evaluated at a cost linear in the numbers of products and periods. Our method estimates demand for 2,000 products from 2,000 selling periods in under ten minutes.

Suggested Citation

  • Chenhao Wang & Hansheng Jiang & Ningyuan Chen, 2026. "Demand Estimation with Unobserved Stockout Substitution: Exact Likelihood Maximization," Papers 2610.34547, arXiv.org, revised Oct 2026.
    • Handle: RePEc:arx:papers:2610.34547
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