Leveraging Quality Information in Stock-Outs for Products with Common-Value Uncertainty and Heterogeneously Informed Consumers

When some consumers are uncertain about a product’s quality, product availability conveys information about the propensity of other, better-informed, consumers to purchase. The willingness-to-pay of lessinformed consumers to buy may therefore increase after observing a stock-out. We develop a model in which the firm can profit from the increased willingness-to-pay after a stock-out via expensive, in-season replenishment. Consumers with better knowledge about the quality (“savvy” consumers) and consumers less knowledge about the quality, but with a low out-side option (“eager, novice” consumers) buy early in the season. Consumers with less knowledge about the quality, but, a relatively high out-side option (“less eager, novice” consumers) buy later in the season, only after an early-season stock-out. We show that stock-outs are informative only when the in-season replenishment is expensive enough, because in this case consumers know the firm has an incentive to purchase a large initial inventory and hence a stock-out provides a credible signal of high quality. We further find that the incentive to reduce inventory to facilitate such signalling is the highest for intermediate levels of consumer heterogeneity in expertise (savvy vs. novice consumers). However, equilibrium profits are then the lowest in this case as well.