Online Inventory Disclosure: Consumer Uncertainty and Experience

Abstract

Given varied consumer perceptions of inventory information, online retailers' presentation of such information influences purchase behavior. We investigate an online retailer's optimal inventory disclosure policy assuming two distinct consumer segments: savvy (or, experienced) consumers, who can predict a retailer's stock levels (even when masked) and naive (or, inexperienced) consumers who rely on prior beliefs regarding (unknown, and hence stochastic) inventory. We analyze a two-period setting in which a retailer clears residual stock in the second period. By jointly and optimally addressing both inventory disclosure and pricing, a retailer can leverage heterogeneous consumers' sensitivity to stock-out risk and thus discourage strategic purchase deferrals. We find that inventory information masking and sharing tactics are optimal at high and low stocking levels, respectively. Even though the threshold structure of this optimal disclosure strategy is robust to the relative proportion of savvy and naive consumers, optimal retailer pro t changes substantially depending on market composition. We find that, if a sufficiently large savvy consumer segment exists, incorrectly assuming all consumers are naive may yield a substantial pro fit loss, even higher than the loss the retailer would have incurred by implementing an incorrect inventory disclosure strategy.