An Empirical Analysis of How Inventory Levels and Prices Affect Online Retail Sales

Online retailers employ varied inventory disclosure tactics ranging from full disclosure at all times to showing mere stock availability cues, which begs the questions “what is the best inventory disclosure strategy” and “can inventory disclosure influence demand at all?” Past academic research in operations and marketing has not reached a consensus, as some researchers advocated that inventory can stimulate demand by indicating popularity or availability, whereas other papers suggest that in some retail settings, low inventory signals scarcity and should stimulate more imminent sales. In this paper, we try to establish a link between inventory and sales empirically by using a large data set that comprises a wide array of products sold at Amazon.com. Controlling for price effects on sales rates and taking into account endogeneity among disclosed inventory levels, prices and sales rates, we show that low disclosed inventory levels stimulate sales. Moreover, we isolate two distinct mechanisms that underlie our main finding, i.e., the frequency of product sales and the magnitude of sales, by which reductions in disclosed inventory and prices positively influence sales rates.