Stockout-based substitution and inventory planning in textbook retailing

We demonstrate the value of utility-based choice models to estimate demand and plan inventory for new and used textbooks in the presence of consumer choice and stockout-based substitution at a university textbook retailer. Demand information is censored, the exact time of stockout is not observed, and the short selling season often does not allow for replenishment. Using data for 26,749 book titles from 2007 to 2011 and a simulation experiment calibrated on real data, we show that an attribute-based choice model generates accurate demand estimates (mean absolute percentage error less than 1%) even when nearly 90% of the textbooks in the fit sample experience stockout. This performance is driven by the heterogeneity of product attributes and is robust to the occurrence of product returns. We implement this model at the bookstore in a controlled field experiment and obtain over 10% increase in profit. The results show that accounting for asymmetric and stockout-based substitution in demand estimation and inventory planning enables us to make systematic corrections in inventory mix and inventory level compared to the existing process.