Optimal Dynamic Allocation of Sales and Rental Inventory at a Retailer

Abstract

As renting becomes more popular among consumers, an increasing number of retailers, especially apparel retailers, are changing their business models to respond to this rising trend. Although some apparel retailers are known to be pure renters, more recently, we see retailers that simultaneously sell and rent the same products. In particular, there are these retailers that are known as primarily renters and are now selling on the side and, those that are primarily sellers, but have started renting on the side. While a retailer in this business earns more by selling instead of renting a single unit, the repeat revenue the retailer can potentially make by renting the same unit multiple times over the season can surpass its sales price and once a unit is sold, the retailer loses that potential revenue; therefore it is critical for these types of retailers to decide how much of its inventory to allocate for sales and rental at every period. We consider a monopolist retailer that starts a season with a fixed amount of inventory and at every period faces demand that splits as renters and buyers based on their utility. We study both of these aforementioned business models and characterize the optimal dynamic sales admission and rental allocation policies respectively and discuss how these decisions change as a function of the retailer's business environment and consumer behavior. Based on the economic trade-off between selling and renting, and drawing interesting parallels with the classic two-fare revenue management problem, we propose a marginal revenue heuristic and numerically show it performs very well for both models. We extend our model to study the impact of competition on a retailer's strategy of selling and renting. We characterize the equilibrium allocation decisions and discuss the different types of equilibria that can emerge.