Structural Estimation of the Effect of Out-of-Stocks

Authors:
Andrés Musalem;Marcelo Olivares;Eric T. Bradlow;Christian Terwiesch;Daniel Corsten
Affiliations:
Fuqua School of Business, Duke University, Durham, North Carolina 27708;Decision, Risk and Operations Division, Columbia Business School, Columbia University, New York, New York 10027;The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104;The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104;Operations and Technology Management, IE Business School, 28006 Madrid, Spain
Venue:
Management Science
Year:
2010

Citing 11
Cited 6

Endogeneity in Brand Choice Models

Management Science
Estimation of Consumer Demand with Stock-Out Based Substitution: An Application to Vending Machine Products

Marketing Science
Management of Multi-Item Retail Inventory Systems with Demand Substitution

Operations Research
Modeling Consumer Demand for Variety

Marketing Science
Competitive Price Discrimination Strategies in a Vertical Channel Using Aggregate Retail Data

Management Science
Bayesian Statistics and Marketing

Marketing Science
Measuring and Mitigating the Costs of Stockouts

Management Science
Inventory Record Inaccuracy: An Empirical Analysis

Management Science
Demand Estimation and Assortment Optimization Under Substitution: Methodology and Application

Operations Research
Deconstructing Each Item's Category Contribution

Marketing Science
Drivers of Finished-Goods Inventory in the U.S. Automobile Industry

Management Science

How Much Is a Reduction of Your Customers' Wait Worth? An Empirical Study of the Fast-Food Drive-Thru Industry Based on Structural Estimation Methods

Manufacturing & Service Operations Management
Structural Workshop Paper---Data Selection and Procurement

Marketing Science
Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis

Marketing Science
Estimating Primary Demand for Substitutable Products from Sales Transaction Data

Operations Research
Clearance Pricing Optimization for a Fast-Fashion Retailer

Operations Research
Clearance Pricing Optimization for a Fast-Fashion Retailer

Operations Research

Quantified Score

Hi-index	0.01

Visualization

Abstract

We develop a structural demand model that endogenously captures the effect of out-of-stocks on customer choice by simulating a time-varying set of available alternatives. Our estimation method uses store-level data on sales and partial information on product availability. Our model allows for flexible substitution patterns, which are based on utility maximization principles and can accommodate categorical and continuous product characteristics. The methodology can be applied to data from multiple markets and in categories with a relatively large number of alternatives, slow-moving products, and frequent out-of-stocks (unlike many existing approaches). In addition, we illustrate how the model can be used to assist the decisions of a store manager in two ways. First, we show how to quantify the lost sales induced by out-of-stock products. Second, we provide insights on the financial consequences of out-of-stocks and suggest price promotion policies that can be used to help mitigate their negative economic impact, which run counter to simple commonly used heuristics.