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On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

Haas School of Business, University of California, Berkeley, Berkeley, California 94720
Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130
xuanming{at}haas.berkeley.edu
fzhang22{at}wustl.edu

This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex ante, commits to a particular quantity) and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex post, if the product is out of stock). Interestingly, the seller has an incentive to overcompensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity.

Key Words: availability guarantee; commitment; product availability; search costs; stockouts; newsvendor; rational expectations
History: Received: July 18, 2007; accepted: December 15, 2008.

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