Inventory Pooling with Strategic Consumers: Operational and Behavioral Benefits

The practice of inventory pooling–serving two or more separate markets using a common inventory stock–is extensively studied in operations management. The operational benefits of this strategy are well known: when demand is stochastic, combining multiple markets reduces aggregate uncertainty and improves the firm’s ability to efficiently match supply and demand, increasing profit as a result. In this paper, we explore a different aspect of pooling: its consequences for consumer purchasing behavior. We analyze a model in which consumers are forward-looking and anticipate end-of-season clearance sales, and may choose to strategically forgo purchasing items at a high price in order to obtain them at a discount. The firm may choose between a separated selling strategy (e.g., many physical stores to serve distinct geographic regions) or a pooled selling strategy (e.g., a single internet channel to serve the entire country). We demonstrate that in addition to the operational benefits of pooling, in this setting a behavioral dimension to pooling exists: by adopting a pooling strategy, the firm influences the amount of inventory available during the clearance sale and hence induces a change in consumer purchase timing. This behavioral dimension of pooling may benefit the firm (when margins are high and demands are negatively correlated) or may hurt the firm (when margins are low and demand is positively correlated). We also consider whether pooling benefits consumers, and find that in contrast to the claims of some retailers, inventory pooling may decrease consumer welfare, particularly if consumers are strategic. This happens because, despite the fact that inventory pooling increases product availability during high price sales, it may increase competition for scarce inventory and decrease product availability during clearance