Store inventory can affect demand: Empirical evidence from magazine retailing

Abstract

In retailing, inventory analysis and inventory practice have traditionally been based on the assumption that underlying demand does not vary with inventory levels. A growing body of research supports the contention that the validity of this assumption has significant implications for optimal inventory policies. The concern for such inventory effects motivated a major US magazine publisher to conduct the market study documented in this article. It presents empirical evidence that demand can indeed vary with inventory, and it quantifies the magnitude of these inventory effects which are twofold. An inventory decrease for one brand can, first, result in a decrease of demand for the brand and, second, in an increase of demand for a competing brand. These observations support the expansion of the traditional Newsvendor model to include inventory effects as well as the practice to make inventory decisions for retail categories rather than individual brands.