IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v54y2008i10p1805-1821.html
   My bibliography  Save this article

Inventory Management Under Market Size Dynamics

Author

Listed:
  • Tava Lennon Olsen

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Rodney P. Parker

    (The University of Chicago Graduate School of Business, Chicago, Illinois 60637)

Abstract

We investigate the situation where a customer experiencing an inventory stockout at a retailer potentially leaves the firm's market. In classical inventory theory, a unit stockout penalty cost has been used as a surrogate to mimic the economic effect of such a departure; in this study, we explicitly represent this aspect of consumer behavior, incorporating the diminishing effect of the consumers leaving the market upon the stochastic demand distribution in a time-dynamic context. The initial model considers a single firm. We allow for consumer forgiveness where customers may flow back to the committed purchasing market from a nonpurchasing "latent" market. The per-period decisions include a marketing mix to attract latent and new consumers to the committed market and the setting of inventory levels. We establish conditions under which the firm optimally operates a base-stock inventory policy. The subsequent two models consider a duopoly where the potential market for a firm is now the committed market of the other firm; each firm decides its own inventory level. In the first model, the only decisions are the stocking decisions and in the second model, a firm may also advertise to attract dissatisfied customers from its competitor's market. In both cases, we establish conditions for a base-stock equilibrium policy. We demonstrate comparative statics in all models.

Suggested Citation

  • Tava Lennon Olsen & Rodney P. Parker, 2008. "Inventory Management Under Market Size Dynamics," Management Science, INFORMS, vol. 54(10), pages 1805-1821, October.
    • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:10:p:1805-1821
    DOI: 10.1287/mnsc.1080.0889
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1080.0889
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1080.0889?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Vishal Gaur & Young-Hoon Park, 2007. "Asymmetric Consumer Learning and Inventory Competition," Management Science, INFORMS, vol. 53(2), pages 227-240, February.
    2. Fitzsimons, Gavan J, 2000. "Consumer Response to Stockouts," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 27(2), pages 249-266, September.
    3. Eric T. Anderson & Gavan J. Fitzsimons & Duncan Simester, 2006. "Measuring and Mitigating the Costs of Stockouts," Management Science, INFORMS, vol. 52(11), pages 1751-1763, November.
    4. Joseph Hall & Evan Porteus, 2000. "Customer Service Competition in Capacitated Systems," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 144-165, November.
    5. Liming Liu & Weixin Shang & Shaohua Wu, 2007. "Dynamic Competitive Newsvendors with Service-Sensitive Demands," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 84-93, June.
    6. Serguei Netessine & Nils Rudi, 2003. "Centralized and Competitive Inventory Models with Demand Substitution," Operations Research, INFORMS, vol. 51(2), pages 329-335, April.
    7. B. L. Schwartz, 1970. "Optimal Inventory Policies in Perturbed Demand Models," Management Science, INFORMS, vol. 16(8), pages 509-518, April.
    8. Arthur F. Veinott, Jr., 1966. "The Status of Mathematical Inventory Theory," Management Science, INFORMS, vol. 12(11), pages 745-777, July.
    9. Gérard P. Cachon & Paul H. Zipkin, 1999. "Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain," Management Science, INFORMS, vol. 45(7), pages 936-953, July.
    10. Noah Gans, 2002. "Customer Loyalty and Supplier Quality Competition," Management Science, INFORMS, vol. 48(2), pages 207-221, February.
    11. Benjamin L. Schwartz, 1966. "A New Approach to Stockout Penalties," Management Science, INFORMS, vol. 12(12), pages 538-544, August.
    12. Steven A. Lippman & Kevin F. McCardle, 1997. "The Competitive Newsboy," Operations Research, INFORMS, vol. 45(1), pages 54-65, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vishal Gaur & Young-Hoon Park, 2007. "Asymmetric Consumer Learning and Inventory Competition," Management Science, INFORMS, vol. 53(2), pages 227-240, February.
    2. Liberopoulos, George & Tsikis, Isidoros & Delikouras, Stefanos, 2010. "Backorder penalty cost coefficient "b": What could it be?," International Journal of Production Economics, Elsevier, vol. 123(1), pages 166-178, January.
    3. Yan, Xiaoming & Chao, Xiuli & Lu, Ye, 2024. "Optimal control policies for dynamic inventory systems with service level dependent demand," European Journal of Operational Research, Elsevier, vol. 314(3), pages 935-949.
    4. Liberopoulos, George & Deligiannis, Michalis, 2022. "Optimal supplier inventory control policies when buyer purchase incidence is driven by past service," European Journal of Operational Research, Elsevier, vol. 300(3), pages 917-936.
    5. Tianhu Deng & Zuo-Jun Max Shen & J. George Shanthikumar, 2014. "Statistical Learning of Service-Dependent Demand in a Multiperiod Newsvendor Setting," Operations Research, INFORMS, vol. 62(5), pages 1064-1076, October.
    6. Philipp Afèche & Mojtaba Araghi & Opher Baron, 2017. "Customer Acquisition, Retention, and Service Access Quality: Optimal Advertising, Capacity Level, and Capacity Allocation," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 674-691, October.
    7. Güler, Kemal & Körpeoğlu, Evren & Şen, Alper, 2018. "Newsvendor competition under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 271(2), pages 561-576.
    8. Xingyue (Luna) Zhang & James A. Dearden & Yuliang Yao, 2022. "Let them stay or let them go? Online retailer pricing strategy for managing stockouts," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4173-4190, November.
    9. Felipe Caro & Victor Martínez-de-Albéniz, 2010. "The Impact of Quick Response in Inventory-Based Competition," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 409-429, January.
    10. Ruomeng Cui & Dennis J. Zhang & Achal Bassamboo, 2019. "Learning from Inventory Availability Information: Evidence from Field Experiments on Amazon," Management Science, INFORMS, vol. 65(3), pages 1216-1235, March.
    11. Deligiannis, Michalis & Liberopoulos, George, 2023. "Dynamic ordering and buyer selection policies when service affects future demand," Omega, Elsevier, vol. 118(C).
    12. Deligiannis, Michalis & Liberopoulos, George & Benioudakis, Myron, 2023. "Dynamic supplier competition and cooperation for buyer loyalty on service," International Journal of Production Economics, Elsevier, vol. 255(C).
    13. Daniel Adelman & Adam J. Mersereau, 2013. "Dynamic Capacity Allocation to Customers Who Remember Past Service," Management Science, INFORMS, vol. 59(3), pages 592-612, January.
    14. James D. Dana, Jr. & Nicholas C. Petruzzi, 2001. "Note: The Newsvendor Model with Endogenous Demand," Management Science, INFORMS, vol. 47(11), pages 1488-1497, November.
    15. Liming Liu & Weixin Shang & Shaohua Wu, 2007. "Dynamic Competitive Newsvendors with Service-Sensitive Demands," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 84-93, June.
    16. Chiang, Wei-yu Kevin, 2010. "Product availability in competitive and cooperative dual-channel distribution with stock-out based substitution," European Journal of Operational Research, Elsevier, vol. 200(1), pages 111-126, January.
    17. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    18. Chopra, Sunil & Glinskiy, Vadim & Lücker, Florian, 2024. "Using anticipatory orders to manage disruption risk over a short product life cycle," European Journal of Operational Research, Elsevier, vol. 319(1), pages 153-167.
    19. Han, Xiaoya & Yu, Yugang & Hu, Guiping, 2019. "A dynamic newsvendor problem with goodwill-dependent demands and minimum commitment," Omega, Elsevier, vol. 89(C), pages 242-256.
    20. Katsuhiko Shimizu, 2008. "New Strategy Implementation and Learning: Importance of Consensus," Working Papers 0034, College of Business, University of Texas at San Antonio.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:54:y:2008:i:10:p:1805-1821. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.