Demand Steering Through the Smokescreen of Stockouts: Evidence from Cigarette Vending Machines

We show evidence of retailers using stockouts to steer demand towards products with higher retailer margins. We consider a unique setting where regulation limits the use of vertical agreements that could weaken steering incentives, prices are set by manufacturers, and product assortment is fixed in the short run. Using data on cigarette vending machines, we find empirical evidence consistent with retailers making strategic product re-stocking decisions. They exert less re-stocking effort for low-margin products, prompting consumers to shift purchases toward high-margin products. In a setting where prices vary infrequently, we exploit variation in product availability as a source of identification to recover preference parameters. Estimated diversion ratios are high across products within the same vending machine and low towards outside retailers. We also recover manufacturers' marginal costs. Counterfactual exercises based on our model parameter estimates measure the welfare effects of demand steering for consumers and manufacturers. On average, welfare losses are economically relevant; however, some manufacturers are better off under strategic stockouts.