Inventory integration with rational consumers

We study the value of inventory integration (or pooling) for a firm selling a seasonal good over two periods: in the first period the firm charges a high price, and in the second period the firm charges a low price to clear remaining inventory. Consumers are rational and decide when to visit the firm based on the price of the product and its anticipated availability. We show that integration—which combines inventory from distinct selling channels or geographic regions, for example, online and offline channels or two physical locations, into a single virtual stock from which any consumer demand may be fulfilled—possesses both operational and behavioral value in this setting. The operational value, which results from better matching of supply and demand, is always positive; however, the behavioral value, which results from the way integration influences inventory availability and hence consumer purchasing incentives, can be positive or negative. Negative behavioral value occurs when integration increases inventory availability in the second period and encourages more consumers to delay a purchase to obtain a lower price; this may significantly reduce, and even make negative, the total value of integration. We show that negative behavioral value of integration is most likely to occur when demand variability is high, the underlying markets are sufficiently correlated, and the salvage value-to-cost ratio is low. We also consider how three additional factors influence the value of integration, and find that the behavioral value of integration is more likely to be negative when the clearance price is endogenously determined as opposed to fixed ex ante or when the component market demands are more asymmetric; however, behavioral value is more likely to be positive when consumers incur visit costs. We conclude that rational consumer behavior can play a substantial role in determining the value of inventory integration.

Duke Scholars

Author Robert P Swinney Fuqua School of Business