Structural Estimation of the Effect of Out-of-Stocks
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Retailers and manufacturers believe that the mere presence of certain items in a retail assortment increases the sales volume of the whole assortment. This paper provides an empirical study of the role of every item in an assortment. Our results show that many items affect category sales over and above their own sales volume. After deconstructing the role of a stockout of individual items into three effects---lost own sales, substitution to other items, and the category sales impact---we find that the category impact has the largest magnitude. Interestingly, the disproportionate impact of individual items on category sales is not restricted to top-selling items, for almost every single individual item affects category sales. It seems that variety is indeed the price of entry in retailing. Our results support recent findings that more frequently purchased categories are less adversely affected by reductions in assortment. We also find that the assortment appears to gain attractiveness when certain items are out of stock, a result that is consistent with the discussion in the literature concerning category clutter.