AN INVENTORY MODEL OF IMMEDIATE AND DELAYED DELIVERY

This paper considers the long run, profit maximizing strategy of a dis tributor that holds a good (good 1) in inventory for immediate deliver y and that offers a second good (good 2) for delayed delivery. When th e two goods are substitutes, an out-of-stock situation for good 1 will cause some consumers (''walkers'') to seek the good elsewhere, other consumers (''waiters'') to accept a raincheck for later delivery of go od 1, and others still (''switchers'') to place an order for good 2. I t is shown that a profit maximizing strategy may entail setting a pric e for the delayed delivery item so as to encourage switching behavior. The rationale is that the distributor can hold a smaller inventory, t hereby incurring lower holding costs, because out-of-stock situations are less costly than they would be without some consumers being willin g to switch.