An Experimental and Empirical Analysis of Consumer Response to Stockouts

Modern retailers typically manage thousands of individual stock keeping units (skus) and are faced with the complex task of stocking, pricing, promoting and maintaining an appropriate product assortment. This task is further complicated by the substantial heterogeneity in consumer preference for di®erent product o®erings. In this environment, it is critical that retail management has some understanding of how consumers respond to product unavailability. The goal of this paper is to develop an understanding of the process of consumer response to product unavailability (stockouts). We attack this problem using two disparate methods. First, we conduct a controlled laboratory experiment to gain insight into what consumers perceive to be the \cost" of choosing from a restricted set of product alternatives. We ̄nd that not only do consumers react negatively to the omission of preferred brands, but also that they experience dissatisfaction when previously available (but unchosen) brands are removed from the choice set. We subsequently use the results of the experiment to develop a random utility model of consumer choice in a product category, and implement this model using \natural experiment" scanner panel data. A key feature of our utility model is that we link a formalization of choice among items and assessment of a collection of items to represent consumer response to product unavailability in frequently-purchased product categories. We ̄nd: (1) that consumers switch in and out of brand/size sku combinations as assortment in terms of a third attribute (e.g., °avor) is increased and decreased, (2) utility is concave in the number of brands available in a category, (3) consumers have a mild preference for variety within a particular brand assortment, and (4) they defer category purchases when confronted with a stockout. The implications for retailers and manufacturers of consumer packaged goods are discussed.