Timing of Product Allocation: Using Probabilistic Selling to Enhance Inventory Management

Fay, Scott and Jinhong Xie (2014). "Timing of Product Allocation: Using Probabilistic Selling to Enhance Inventory Management." Management Science (Forthcoming)

Posted: 10 May 2014

See all articles by Scott Fay

Scott Fay

Syracuse University

Jinhong Xie

University of Florida - Warrington College of Business Administration

Date Written: February 1, 2014

Abstract

This paper examines probabilistic selling (PS) as an inventory management mechanism, paying special attention to the impact of the timing of product assignment to buyers of probabilistic goods. In practice, sellers tend to offer probabilistic products only after major demand uncertainty has been resolved. By deferring product assignments, a firm is able to obtain more information about demand for each specific product before deciding which product to assign to consumers. However, our analysis demonstrates that PS can be an effective inventory-management mechanism even if the firm allocates products before knowing which product will be more popular, and thus scarcer. Interestingly, we show that it can be more profitable for the firm to allocate products to consumers before, rather than after, learning the true demand for a product because, although early allocation imposes higher inventory costs (due to larger required inventory levels), it also enables the firm to charge higher prices. Our results also reveal that, when introducing probabilistic goods, the firm should order less inventory (relative to the case where probabilistic goods are not offered) if costs are very low, but more inventory otherwise. Finally, we show that PS, as an inventory-management mechanism, can create a win-win situation, both improving profit and increasing social welfare.

Keywords: probabilistic selling, inventory management, demand uncertainty, opaque goods

JEL Classification: M31, D21, D8

Suggested Citation

Fay, Scott and Xie, Jinhong, Timing of Product Allocation: Using Probabilistic Selling to Enhance Inventory Management (February 1, 2014). Fay, Scott and Jinhong Xie (2014). "Timing of Product Allocation: Using Probabilistic Selling to Enhance Inventory Management." Management Science (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2434555

Scott Fay (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States
315-443-3456 (Phone)

HOME PAGE: http://whitman.syr.edu/Directory/ShowInfo.aspx?id=360

Jinhong Xie

University of Florida - Warrington College of Business Administration ( email )

209 Bryan Hall Campus Box 117155
Gainesville, FL 32611-7166
United States
352-392-0161 Ext. 1233 (Phone)
352-846-0457 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/xie/Xie_DirectoryProfile.htm

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