Asymmetric Consumer Learning and Inventory Competition

Abstract

We develop a model of consumer learning and choice behavior in response to uncertain service at the marketplace. Learning could be asymmetric, i.e., 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 constant in-stock service level. We then consider a non-cooperative game at the steady-state between two retailers competing on the basis of their service levels. 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.