Behavior in rationing inventory across retail channels

When demand exceeds available inventory, suppliers ration their inventory among customers (e.g., retail channels). While there are quantitative methods to facilitate these choices, in practice, humans play an important role in making final decisions that affect allocation efficiency. How do inventory risk and contractual differences (i.e. payment schemes) behaviorally affect allocation decisions when there is scarcity? We study inventory allocations between two retail channels: a high value channel with risk, and a low value channel without risk. The retail channels may also differ in terms of the timing and type of payments that take place. We develop theoretical predictions from behavioral models based on risk aversion, loss aversion, and mental accounting and test these through incentivized controlled laboratory experiments. When profit differences between channels are medium to large, subjects allocate significantly less inventory than the expected–profit–maximizing quantity to the risky, yet more profitable, channel and subjects with stronger risk appetite allocate larger quantities to the risky channel. More interestingly, risk appetite moderates the effect of the timing and type of payments on allocations in these settings. When profit differences between channels are small, the effect of risk appetite depends on the timing of payments. Overall, the possibility of experiencing negative payments (e.g., through buy–backs) reduces allocated quantities across settings. Our insights can inform planner assignment to tasks but also the design of support systems that provide information to planners who make allocation decisions.