Asymmetric Consumer Learning and Inventory Competition

ABSTRACT - We develop a model of consumer learning and choice behavior in response to uncertain service at the marketplace. Learning could be asymmetric, i.e., consumers may associate different weights with positive and negative experiences. Under this demand model, we consider a non-cooperative game between two retailers competing on the basis of their service levels. Our model yields a unique pure strategy Nash equilibrium. We show that the inventory game is analogous to a Prisoners’ Dilemma, and that asymmetry in consumer learning has a significant impact on total industry profits and inventory levels. When retailers have different costs, it also determines the extent of competitive advantage enjoyed by the lower cost retailer.

Citation:

Vishal Gaur and Young-Hoon Park (2005) ,"Asymmetric Consumer Learning and Inventory Competition", in AP - Asia Pacific Advances in Consumer Research Volume 6, eds. Yong-Uon Ha and Youjae Yi, Duluth, MN : Association for Consumer Research, Pages: 196.

Asia Pacific Advances in Consumer Research Volume 6, 2005      Page 196

ASYMMETRIC CONSUMER LEARNING AND INVENTORY COMPETITION

Vishal Gaur, New York University, U.S.A.

Young-Hoon Park, Cornell University, U.S.A.

ABSTRACT -

We develop a model of consumer learning and choice behavior in response to uncertain service at the marketplace. Learning could be asymmetric, i.e., consumers may associate different weights with positive and negative experiences. Under this demand model, we consider a non-cooperative game between two retailers competing on the basis of their service levels. Our model yields a unique pure strategy Nash equilibrium. We show that the inventory game is analogous to a Prisoners’ Dilemma, and that asymmetry in consumer learning has a significant impact on total industry profits and inventory levels. When retailers have different costs, it also determines the extent of competitive advantage enjoyed by the lower cost retailer.

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