Title: When do retailers benefit from special ordering?

Authors: Diwakar Gupta, Haresh Gurnani, Hao-Wei Chen

Addresses: Industrial and Systems Engineering Program, University of Minnesota, 111 Church Street S.E., Minneapolis, MN 55455, USA. ' Department of Management, School of Business Administration, University of Miami, Coral Gables, FL 33124, USA. ' Industrial and Systems Engineering Program, University of Minnesota, 111 Church Street S.E., Minneapolis, MN 55455, USA

Abstract: Many retailers offer to special order out-of-stock items at no additional cost to the customers. This practice is based on an implicit assumption that by increasing sales and reducing stockouts, special orders increase retailers| profits. We study the relative benefit of special ordering to the retailer and show that this assumption may not hold. Our model reveals two counter-intuitive results. First, the retailer|s expected profit is higher when the manufacturer has additional pricing flexibility, i.e., the manufacturer offers two prices, a base price for the primary order and a different price for the special order, as compared to a single price for all items. Second, higher demand variability may increase retailer|s profits.

Keywords: retail operations; special orders; pricing mechanisms; demand variability; pricing flexibility; profitability.

DOI: 10.1504/IJIR.2010.031461

International Journal of Inventory Research, 2010 Vol.1 No.2, pp.150 - 173

Available online: 05 Feb 2010 *

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