Stockout Compensation: Joint Inventory and Price Optimization in Electronic Retailing
INFORMS Journal on Computing, 2006

Delays in product availability are common in e-commerce where electronic retailers try to manage with very low inventories. While this lowers inventory costs, the negative effect of increased stockouts is to reduce net demand for the product. in this paper, Professor Hemant Bhargava and co-authors Daewon Sun of the University of Notre Dame and Susan H. Xu from Penn State analyze the effect of offering a lower price during stockout to compensate for a customer’s waiting time, using an EOQ-type inventory-modeling framework but solving simultaneously for both the optimal prices and the lengths of the in-stock and stockout periods.