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

We examine how retailers can strategically influence demand toward higher-margin products at the expense of manufacturers’ and consumers’ interests. Specifically, we focus on an understudied mechanism as a tool for demand steering: stockouts. Our empirical evidence suggests that retailers make strategic restocking decisions, putting less effort into restocking low-margin products and prompting consumers to shift purchases towards high-margin products. The analysis uses a unique dataset where we observe both sales and latent demand, i.e., how many sales a certain product lost when it was out of stock. By exploiting variation in product availability, we recover preference parameters in a setting where prices vary infrequently. Estimated diversion ratios are high across products within the retailer and low towards outside retailers. We also recover manufacturers’ marginal costs and perform counterfactual exercises to measure the welfare effects of demand steering on consumers and manufacturers. Results indicate that while welfare losses are economically relevant on average, retailers and some manufacturers benefit from strategic stockouts. Our paper sheds light on the challenges of detecting demand steering in habitual contexts and the market inefficiencies arising from downstream moral hazard.