Asymmetric Consumer Learning and Inventory Competition

Abstract

We develop a model of consumer learning and choice behavior in response to uncertain service in the marketplace. Learning could be asymmetric, that is, consumers may associate different weights with positive and negative experiences. Under this consumer model, we characterize the steady-state distribution of demand for retailers given that each retailer holds a constant in-stock service level. We then consider a noncooperative game in steady state between two retailers competing on the basis of their service levels. The demand distributions of retailers in this game are modeled using a multiplicative aggregate market-share model in which the mean demands are obtained from the steady-state results for individual purchases, but the model is simplified in other respects for tractability. Our model yields a unique pure strategy Nash equilibrium. We show that asymmetry in consumer learning has a significant impact on the optimal service levels, market shares, and profits of the retailers. When retailers have different costs, it also determines the extent of competitive advantage enjoyed by the lower-cost retailer.

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