The role of e-tailer inventory policy on e-tailer pricing and profitability

This study explores the impact of the e-tailer's inventory policy on its pricing strategy and profitability via a two-period model. Specifically, we identify two inventory policies: zero inventory and positive inventory. The findings show that the zero-inventory e-tailer charges lower prices than the positive-inventory one, but the price differential decreases over time if the market expands rapidly. The findings also show that the zero-inventory policy is preferred under a moderately positive relationship between reservation price and impatience for delivery, whereas the positive-inventory policy is preferred when these two variables are independent of each other. Furthermore, the results show that a more rapid expansion of market is a favorable condition for the zero-inventory e-tailer. The authors also discuss the implications of the inventory policy for an e-tailer's performance. (C) 2004 by New York University. Published by Elsevier.