| dc.description.abstract | What is the relationship between inventory and sales? Clearly, inventory could
increase sales: expanding inventory creates more choice (options, colors, etc.) and might
signal a popular/desirable product. Or, inventory might encourage a consumer to continue
her search (e.g., on the theory that she can return if nothing better is found), thereby
decreasing sales (a scarcity effect). We seek to identify these effects in U.S. automobile
sales. Our primary research challenge is the endogenous relationship between inventory
and sales—e.g., dealers influence their inventory in anticipation of demand. Hence, our
estimation strategy relies on weather shocks at upstream production facilities to create
exogenous variation in downstream dealership inventory. We find that the impact of
adding a vehicle of a particular model to a dealer’s lot depends on which cars the dealer
already has. If the added vehicle expands the available set of submodels (e.g., adding a
four-door among a set that is exclusively two-door), then sales increase. But if the added
vehicle is of the same submodel as an existing vehicle, then sales actually decrease. Hence,
expanding variety across submodels should be the first priority when adding inventory—
adding inventory within a submodel is actually detrimental. In fact, given how vehicles
were allocated to dealerships in practice, we find that adding inventory actually lowered
sales. However, our data indicate that there could be a substantial benefit from the
implementation of a “maximize variety, minimize duplication” allocation strategy: sales
increase by 4.4% without changing the total number of vehicles at each dealership. | |
