E-tailers' Inventory Storage Location and Pricing Decisions with Strategic Customer Behavior Consideration

This paper examines how strategic customer behavior impacts e-tailers' inventory storage location, pricing and inventory level decisions. We build a stylized model where an e-tailer either has only a central warehouse, or add a local warehouse and thus has both warehouses for inventory storage. Central (Local) warehouse is away from (close to) customer place so shipping cost to customers is high (low) while inventory holding cost is low (high). We show that when customers are strategic, the firm lowers price after moving inventory locally. When customers are strategic and inventory is stored in both warehouses, the firm increases price as shipping cost from central warehouse to customers decreases, holding cost in local warehouse increases or a product becomes more perishable (less durable), which all reduce the benefits of postponing purchase for strategic customers and increase their willingness to pay. Moreover, the behavioral impact from a higher local holding cost or a more perishable product can even increase firm profit, and the firm may stop using local warehouse when the local holding cost decreases. Finally, we show that an e-tailer may want to add a local warehouse and move some inventory there from carry all the inventory centrally as demand uncertainty decreases, which is consistent with a recent practice by some e-tailers that start building warehouses close to customers