Seminar (Dept. of Management Science and Engineering)

Theme：E-tailers' Inventory Storage Location and Pricing Decisions with Strategic Consumer Behavior Consideration

Speaker：Chao Liang (Cheung Kong Graduate School of Business)

Time：2021-11-03 10:00

Address：Tencent Meeting

Language：Chinese/English

ABSTRACT：

This paper examines how strategic consumer behavior impacts e-tailers' inventory storage location, pricing and inventory level decisions. We build a stylized model where an e-tailer either has only a central warehouse, or add a local warehouse and thus has both warehouses for inventory storage. Central (Local) warehouse is away from (close to) consumer place so shipping cost to consumers is high (low) while inventory holding cost is low (high). We show that with strategically behaved consumers, the firm lowers price after moving inventory locally. When inventory is optimally stored in both warehouses, the firm increases price as shipping cost from central warehouse to consumers decreases, holding cost in local warehouse increases or a product becomes more perishable (less durable), which all reduce the benefits of postponing purchase for consumers and increase their willingness to pay. Yet the firm may increase its total inventory level and store more inventory in the local warehouse as the product becomes less perishable. Moreover, the behavioral impact from a higher local holding cost can increase firm profit, and the firm may stop using local warehouse when the local holding cost decreases. Our numerical study shows that an e-tailer may want to add a local warehouse and move some inventory there from carry all the inventory centrally as demand uncertainty decreases, which is consistent with a recent practice by some e-tailers that start building warehouses close to customers. Finally, we show that the main insights in the one-local-warehouse case remain valid when there are multiple local warehouses. (This is a joint work with Yuxin Chen from NYU Shanghai).