Intertemporal Pricing with Resellers: An Empirical Study of Product Drops

Abstract

Product drops occur when a retailer releases a limited-edition product line on a specific date for a short period of time. Due to limited inventory of the product and the short sales horizon, a resale market emerges where products may resell at higher prices once the firm stocks out. The firm faces a central tradeoff: pricing too high may lead to a longer stockout time and future markdowns; pricing too low may lead to transfer of profits to resellers. Any firm in this position may ask, “How do resellers impact my profit?” To answer this question, we build a dynamic structural model that captures customer decisions to consume or strategically resell, as well as the firm’s intertemporal pricing decision in the presence of resellers. We estimate our model using a unique data set from a retailer of baby clothing with weekly product drops, where customers engage in a resale marketplace through Facebook groups. We find resale data collection and analysis is valuable to incorporate into pricing as firm profit increases by 8.8%, and reseller presence reduces firm profit by 5.8% even if resale data are used in pricing. These impacts are magnified by resale market growth, demonstrating that managers need to take action as resale markets gain wider adoption. This paper was accepted by Victor Martínez-de-Albéniz, operations management. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04152 .