Document Type

USD Users Only

Publication Date

Spring 4-1-2020


Pre-print: the initial article submitted to the journal for consideration (prior to peer review)

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.


Agribusiness | Business | E-Commerce | Management Sciences and Quantitative Methods | Marketing | Operations and Supply Chain Management


Fruits and vegetables that are harvested below grocery chains' aesthetic standards are typically left unsold upstream in the supply chain. Because growers face high uncertainty in their harvesting conditions and in the aesthetic quality of their crops and there is little data available to predict the value consumers attach to aesthetically defective produce, it is difficult to match these products' available supply with consumers' willingness to pay to profitably market these items. We study this issue in partnership with an online retailer marketing below-grade produce to consumers. We incorporate a multiple discrete-continuous extreme value (MDCEV) choice model and a compensating variation estimation procedure to calculate consumer compensations that the retailer can use to incorporate opportunity costs of stockouts in its inventory models. We then use an econometric model to evaluate how opportunity costs of stocking out increase in the prices consumers are willing to pay for these items. From this model, we quantify how optimal stockout rates decrease as a result of greater consumer appreciation for the items sold by the retailer. We nd that opportunity costs increase, on average, by 4.5% for every dollar increase in price. However, the optimal stockout probability for these items is generally inelastic with respect to price. Therefore, a greater consumer appreciation for these items requires increasingly modest reductions in the items' optimal stockout rates, putting retailers in a better position to market their produce. We outline several policies retailers can adopt to achieve this goal.