Competing Retailers and Inventory: An Empirical Investigation of U.S. Automobile Dealerships

In this study we empirically estimate the e¤ect of local market conditions on inventory performance of U.S. automobile dealerships. We show that the in‡uence of competition on a retailer’s inventory holdings can be separated into two mechanisms. First, the entry or exit of a competitor can change a retailer’s demand (a sales e¤ect). Second, the entry or exit of a competitor can change the amount of bu¤er stock a retailer chooses to hold, which in‡uences the probability a consumer …nds a desired product in stock (a service level e¤ect). The sales e¤ect can in‡uence inventory through the presence of economies of scale. Theoretical arguments of inventory competition are ambiguous on the expected sign of the service level e¤ect: there are models suggesting that service level increases, decreases or remains constant with entry. We obtained data (via a web crawler) on inventory and sales of auto dealerships of a large manufacturer. Using cross-sectional variation of dealers in isolated markets, we estimated the e¤ect of market structure (number and type of competitors), local demographics and sales on inventory levels. We used market population as an instrumental variable to control for the endogeneity of market structure. Our results suggest a strong positive nonlinear e¤ect of the number of rivals on service levels. Furthermore, we …nd that the impact of competition on inventory via the service level e¤ect is comparable to the impact via the sales e¤ect. Counterfactual experiments indicate that reducing the dealership network of this manufacturer (thereby reducing competition) could reduce the remaining dealers’ days-of-supply (inventory divided by average sale rate) from 13% to 24%.