Inventory Pooling with Strategic Consumers: Operational and Behavioral Benefits

The practice of inventory pooling is extensively studied in operations management. The operational benefits of this strategy are well known: combining multiple markets reduces aggregate uncertainty and improves the firm’s ability to efficiently match supply and demand. 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 sells in two markets, and chooses between a separated selling strategy (dedicated inventory to serve separate markets) and a pooled selling strategy (a single stock of inventory to serve both markets). 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 demands are positively correlated). We also consider whether pooling benefits consumers, and find that 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 sales