Imagine it is the weekend. You are in the supermarket and working through your shopping list for the coming week. When searching for your favourite wine you notice that it is currently out-of-stock. What do you do now?
A survey from Philip Schary and Martin Christopher published in 1979 in the Journal of Retailing asked British supermarket shoppers about their behavior in such a situation. About half of the respondents look for the item somewhere else. About 20 percent decided to wait until the next trip, 10 percent did not want to buy the item any more, one sixth decided to switch to another brand or product, and 5% of the customers simply bought a product from the same brand but with a different size. The effect that consumers would look for the product somewhere else was stronger for more popular brands.
Stock-outs as an incentive for competition
These numbers tell us that stock-outs probably lead to fewer sales for the supermarkets. Subramanian Balachander and Peter Farquhar from Clark University presented a game-theoretical model in Marketing Science in 1994 that tell us otherwise. Their argument is that stock-outs lead to less competition in the marketplace, especially if customer search costs are low (e.g. there is another supermarket next door, or the product is sold online). The competitor that would be visited by customers searching for the product would sell more, and have little incentives to also lower its price – good for the competitor. But it is also good for the company with the stock-out, as the price level generally remains high, with a higher margin, and the incentives are lower for downward price changes. As the researchers could show, these price-stabilizing factors have a larger impact on profits than preventing occasional stock-outs.
Price optimisation with the help of stock-outs
In our view, the marketplace is subject to multiple competitors which may not behave rational in all cases and which may simply lack relevant information for sensible business decisions. Closely monitoring competitors’ stock levels for adjusting prices would be very helpful in this context. Stock-outs at many competitors may even open up possibilities for price increases of the few retails carrying the remaining items.
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