Transportation Research Part E 42 (2006) 258–271

www.elsevier.com/locate/tre

The adoption of inventory postponement and speculation:

An empirical assessment of oligopolistic Internet retailers
Joseph P. Bailey a, Elliot Rabinovich b,*

a
Department of Decision and Information Technologies, Robert H. Smith School of Business,
University of Maryland, College Park, MD 20742-1815, USA
b
Supply Chain Management, P.O. Box 874706, W.P. Carey School of Business, Arizona State University, Tempe,
AZ 85287-4706, USA

Received 19 September 2003; received in revised form 22 August 2004; accepted 4 September 2004

Abstract

Unlike traditional retailers, which use inventory speculation for all their merchandise, Internet book
retailers selectively use inventory postponement for specific merchandise items to lower their inventory
costs. We develop and test hypotheses that describe merchandise determinants of inventory postponement
and speculation at two oligopolistic retailers: Amazon.com and Barnesandnoble.com. We find that mer-
chandise popularity raises both firmsÕ likelihood of inventory speculation. Furthermore, merchandise vin-
tage affects negatively both firmsÕ likelihood of inventory speculation. Merchandise price affects negatively
the likelihood of inventory speculation for Amazon.com and positively for Barnesandnoble.com. This may
be due to conditions within Barnesandnoble.com, which operates physical and Internet channels.
Ó 2005 Elsevier Ltd. All rights reserved.

Keywords: Electronic commerce; Inventory management; Postponement analysis; Empirical study

*
Corresponding author. Tel.: +1 480 965 5398.
E-mail address: elliot.rabinovich@asu.edu (E. Rabinovich).

1366-5545/$ - see front matter Ó 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.tre.2004.09.002
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 259

1. Introduction

Over the past decade, a number of Internet retailers have pinned their hopes for success onto
dropshipping services provided by vendors, such as Ingram Entertainment (Reynolds, 2001). As
part of these dropshipping services, Internet retailersÕ vendors stock and own the items needed
to fulfill end consumersÕ orders. Furthermore, vendors arrange with third party firms (e.g.,
UPS and FedEx) to ship the orders, at the Internet retailersÕ request, to delivery destinations speci-
fied by consumers (Karpinski, 1999).
Dropshipping services allow Internet retailers to postpone their decisions to take inventory
ownership for selected items in the merchandise portfolio they offer to consumers. In these in-
stances, the retailersÕ vendors own the inventory until it is sold to those consumers placing orders
through the retailersÕ sites. By postponing inventory ownership, Internet retailers avoid sinking
capital into inventory carrying costs and warehousing assets. Moreover, they can take advantage
of their vendorsÕ ability to perform warehousing and operations activities more efficiently
(Fuscaldo, 2003).
Despite these benefits, anecdotal evidence of retailers participating in dropshipping arrange-
ments shows mixed success. In 2000, Value America declared bankruptcy partly due to its inabil-
ity to leverage dropshipping services to fulfill consumer orders on time. Other merchants, such as
REI.com, have succeeded by relying substantially on their own inventory capabilities. Instead of
relying on inventory owned by their vendors, these merchants have opted to speculate and take
ownership of all inventory at their locations, prior to online consumers placing orders at their
sites.
The conflicting evidence, as well as the increasing prominence of dropshipping services, moti-
vated us to study the adoption of this inventory management strategy in electronic commerce. In
particular, we study determinants of inventory postponement and speculation by Internet retailers
respectively operating in dropshipping and in-stock inventory contexts. We show how merchan-
dise characteristics influence the way two dominant Internet retailers go about postponing or,
alternatively, speculating inventory ownership to compete in an oligopolistic segment of electronic
commerce.
In so doing, we contribute to a growing body of literature studying the strategic importance of
inventory management in electronic commerce. First, our study extends analytical work on inven-
tory speculation and postponement by Bailey and Rabinovich (2005). It provides an empirical
examination of retailer conduct in an environment where positive or negative differences between
market demand and accumulated stock volumes can respectively lead to important underage and
overage costs in a single-stage (i.e., newsvendor-type) environment (Nahmias, 1982 and Raafat,
1991).
Second, by focusing on an oligoplisitic context, our study isolates effects by merchandise char-
acteristics on retailersÕ inventory postponement and speculation decisions. These effects extend
empirical work that has exclusively focused on the effects by retailer-level determinants of inven-
tory postponement and speculation decisions. This past research has shown that a retailerÕs lon-
gevity and overall market demand stability are negatively related to a reliance on inventory
postponement (Randall et al., 2002). Moreover this research has exposed a negative association
between inventory-postponement reliance and a retailerÕs demand volume (Rabinovich and Evers,
2003).
260 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

To meet our research objectives, we begin in Section 2 by developing a theoretical framework

that combines the literature on inventory speculation and inventory postponement. This section
also develops three hypotheses that will be empirically tested. Section 3 describes the empirical
context and the methodology of our investigation. Section 4 presents the results of the analysis.
Finally, Section 5 discusses the results and presents the implications stemming from our research.

2. Theory and hypothesis development

The study of inventory speculation and postponement decisions has been traditionally couched
at the firm level of analysis. Firms have been assumed to make these decisions monolithically,
without any variation across the different items within their merchandise portfolios. Few research-
ers have departed from this assumption and those that have done so (e.g., Bucklin, 1965; Pagh
and Cooper, 1998; and Zinn and Bowersox, 1988), have considered the role of cost and service
factors that are extrinsic to the merchandise items for which inventory postponement and specu-
lation decisions are made.
Only recently, have researchers considered intrinsic merchandise characteristics in their study of
inventory postponement and speculation. Much of this work is positioned in an Internet retailing
context. We speculate that such a contextual convergence follows from Internet retailing firms
having the ability to dynamically choose between these two inventory management policies.
For example, Amazon.com may decide to source a book title from its own warehouse for an order
one minute, and then source another title from a vendorÕs warehouse the next. Amazon.com and
other Internet retailers are able to do this because the sourcing location is completely immaterial
to the consumer. Moreover, the fulfillment of Internet consumer orders is individualized and in-
volves a relatively low number of items, eliminating many of the decision-making constraints that
lead to merchandise-wide decisions to rely on inventory speculation.
Rabinovich and Evers (2003) rely on discrete-event simulation to show that under increasing
merchandise demand levels, Internet retailers can provide optimal service to consumers by fulfill-
ing orders through inventories located at their own facilities and avoid relying on inventories held
elsewhere in the supply chain. Netessine and Rudi (2003) analytically demonstrated that inventory
location postponement arrangements lower inventory-holding costs relative to overall inventory
investment in two possible cases: (1) when merchandise is sold at a large number of online retailers
participating in inventory location postponement arrangements, or (2) when merchandise at those
retailers faces an increase in market demand variability. Rabinovich (2005) simulated inventory
location postponement and speculation regimes to analyze how emergency transshipments can re-
duce stockout occurrences without expanding safety- and cycle-stocks at the inventory locations
supporting the fulfillment of online consumer orders. He found that these benefits are maximized
when inventory locations fulfill merchandise demand that is uniformly balanced across markets
assigned to each location.
More recently, Bailey and Rabinovich (2005) analytically show that Internet retailers should
view postponement (through the use of common dropshipping arrangements with suppliers)
and speculation as complementary, not substitute, options in the management of their inventory.
They show that as merchandise popularity increases, Internet retailers interested in optimizing
their inventory management costs should consider relying more heavily on both inventory
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 261

management strategies. Bailey and Rabinovich (2005) posit that leading Internet retailers have, in
fact, pursued the adoption of these inventory management alternatives, but do not provide empiri-
cal validity for this inference.
We add to this stream of research by empirically assessing the significance of merchandise pop-
ularity as a determinant of the adoption of inventory speculation strategies, based on Internet
retailersÕ sourcing their own in-stock merchandise, to meet their consumersÕ demands. As mer-
chandise popularity increases, the risk associated with having a product in-stock is reduced be-
cause demand is higher. Thus, as merchandise popularity increases, it is more likely that an
online retailer would source merchandise from its own inventory and use speculation instead of
postponement as an inventory management model (Bailey and Rabinovich, 2005). This leads to
the first hypothesis:
Hypothesis 1. An increase in merchandise popularity increases an Internet retailerÕs reliance on
inventory speculation.
Demand uncertainty is another important factor in the decision by Internet retailers to adopt
inventory management policies that postpone the location of inventory to facilities owned by the
retailersÕ suppliers. Prior research in offline environments has yielded conflicting evidence on this
issue. While Levy (1985) and Walker and Weber (1987) report a negative link between demand
uncertainty and inventory postponement, Harrigan (1986) reports a direct correspondence be-
tween demand uncertainty and inventory postponement.
A wide diversity in constructs and research settings may account for these conflicting results.
Research has tried to address these shortcomings by focusing on merchandise time in market
(i.e., merchandise vintage) as an objective indicator of demand uncertainty. As merchandise vin-
tage increases, demand uncertainty for products will increase because merchandise updates and
incompatibility with new versions become more likely (Bulow, 1986). This effect may be even
more pronounced in the case of information goods such as new book editions because they could
instantly lower expectations of future retail sales for a previously released item.
Thus, as merchandise vintage increases, demand uncertainty for the merchandise will rise, and
Internet retailers will be less likely to assume the responsibility of taking ownership of inventory
needed to fulfill this merchandiseÕs demand. Moreover, the increase in uncertainty, brought about
by merchandise vintage, will lead to increased inventory costs due to a greater mismatch between
merchandise supply and demand and, subsequently, a higher risk of unsold stock. The implemen-
tation of an inventory management strategy that pools stocks into fewer locations may minimize
these effects (Eppen, 1979). While these pooling benefits can accrue across various supply chain
echelons, they will be more evident when inventory is resident upstream in the supply chain, where
firms have the scale to handle inventory replenishment and order releases more efficiently (Rabi-
novich and Evers, 2003). These arguments lead to our second hypothesis.
Hypothesis 2. A decrease in merchandise vintage increases an Internet retailerÕs reliance on
inventory speculation.
Irrespective of demand uncertainty, Internet retailersÕ decisions to rely on inventory speculation
or postponement are dependent on the risks they incur when holding merchandise in stock. The
value of the merchandise amplifies these risks, as it will increase the costs associated with inven-
tory obsolescence and pilferage. Therefore, Internet retailers will favor relying on dropshipping
262 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

for those items that carry a relatively high value. In doing so, the retailers will take merchandise
ownership only when demand arises and will transfer obsolescence and pilferage risks to their sup-
pliers, who may be better positioned to mitigate these risks through a more effective use of salvage
channels (Majumdar and Ramaswamy, 1995; Randall et al., 2002). Therefore, as product price
increases, Internet retailers will be more likely to use inventory postponement, instead of inven-
tory speculation, through the sourcing of merchandise from their own inventory. Our third
hypothesis summarizes this conclusion.
Hypothesis 3. A decrease in product price increases an Internet retailerÕs reliance on inventory
speculation.

3. Methodology

3.1. Empirical setting

Following the considerations outlined in the Introduction section, the testing of the hypotheses
was performed within an Internet-book-retailing context. In the book-retailing segment of elec-
tronic commerce, it is possible to test the hypotheses in a newsvendor-type setting––in which retail-
ers manage inventory to minimize differences between market demand and accumulated stock
volumes within each stock keeping unitÕs (SKU) single cycle (i.e., a book edition). Also, this seg-
mentÕs structure is defined by oligopolistic competition between two dominant retailers:
Amazon.com and Barnesandnoble.com. As indicated in the Introduction section, this industry
structure allowed us to isolate effects by merchandise characteristics on retailersÕ inventory postpone-
ment and speculation decisions. These effects extend empirical work that has exclusively focused on
the effects by retailer-level determinants of inventory postponement and speculation decisions.
Focusing on Amazon.com and Barnesandnoble.com supported the studyÕs external validity and
statistical generalizability, since these firms account for a large proportion of industry sales
(US Census Bureau, 1999, 2000a,b). These retailers represent two of the most significant and
successful Internet merchants in the book industry, where Amazon.com has a sizable portion of
the Internet book market. Furthermore, business reports suggest that both Internet retailersÕ inven-
tory-postponement and sourcing policies closely follow the model conditions presented earlier.
Moreover, the retailersÕ consumer order arrival processes and SKU demand patterns are represen-
tative of industry conditions, ensuring the modelÕs external validity and the resultsÕ statistical gen-
eralizability. The retailers are among the oldest Internet book sellers and offer one of the marketÕs
widest book selections. Finally, they are the only Internet book retailers that measure and disclose
to the public intrinsic popularity rankings specific to the books sold through their online sites.

3.2. Operationalization

To capture Internet retailer reliance on inventory postponement versus speculation for a mer-
chandise item, we established a binary measure of whether the item is held and owned in-stock by
the Internet retailer. This variable, INSTOCK, is coded as 1 when the item is in the retailerÕs
possession. INSTOCK equaled 0 when the itemÕs location is postponed to inventory facilities
owned by the retailerÕs suppliers.
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 263

Although Amazon.com and Barnesandnoble.com did not actually specify whether inventory
for an item was handled in a speculative fashion, it was evident from their pledged shipping
(or sourcing) time (not the delivery time) whether the item came from their own in-stock inventory
or whether it was dropshipped from inventory resident at locations owned by their suppliers.
According to fulfillment policies disclosed by the retailers at the time we collected our data, items
were pledged to ship within 24 hours if they were held and owned at the retailersÕ inventory loca-
tions. The remaining items available for sale were sourced from inventory placed at locations
owned by suppliers farther upstream in the supply chain.
We collected data to identify Internet retailer reliance on inventory speculation (i.e., in-stock)
or postponement (i.e., dropship) for each individual book over the duration of the order cycle. To
establish this inventory availability, we gathered information on the promised time involved in
shipping each book to consumers. This information was collected when independent variables
were also measured. Concurrently, information about the linkage between the inventory manage-
ment strategy (in-stock versus dropship) for each book and promised shipping lead time was ob-
tained from the studied Internet retailersÕ fulfillment policies, published online at the time data
was collected. This information resulted in the coding scheme for INSTOCK described above.
Out of stock items that were listed on the Internet sites, but not available for sale through the
sites, were not considered in the analysis.
Our measure of merchandise popularity comes from the sales rank data provided by the Internet
retailers for each title. Our specific measure, POPULAR, is 1 times the natural log of the sales
rank for that specific retailer. We log the sales rank data to correct for skewness in the sales rank
data (the data has a very long tail). We multiply this value times 1 in order to convey a more intui-
tive interpretation of the data––as POPULAR increases, the title is more popular. Therefore, a title
with a sales rank of 1 would have the highest measure of POPULAR in the sample.
Our measure of merchandise vintage comes from an examination of the time elapsed since the
release of each book. This corresponds to the number of days that elapsed since the time of the
bookÕs date of release up until the date we collected the data for our study. Since this distribution
is skewed left, we take the natural log of this value. The result is a measure called VINTAGE.
Our measure of product price is the posted price the retailer charged for the book at the time
the observation was collected. This value, PRICE, is a measure of US dollars and does not include
shipping costs or any tax that may be assessed on an order.
Finally, we have two control variables to correct for the time and day of the observation. DAY
is an integer value from 1 to 30 that is a measure of the day of our observation. We use this var-
iable to correct for any variation in the data to indicate drifting in actual inventory levels and
stock replenishments, as well as updates in the online retailerÕs inventory information over time.
HOUR is an integer value ranging from 0 to 23 that indicates the hour of the day when the obser-
vation was collected. This variable controls for hourly drifting in inventory levels at the Internet
retailer, as well as changes in stock replenishments and inventory information updates.
To empirically test Hypotheses 1 through 3 we use a logit model where our dependent variable
is INSTOCK and the other variables are used as independent variables:
INSTOCK ¼ b0 þ b1 POPULAR þ b2 VINTAGE þ b3 PRICE þ b4 DAY þ b5 HOUR
A logit regression is an appropriate choice because the dependent variable is binary. Consistent
with prior studies, a logit regression is also an appropriate approach for discrete choice modeling,
264 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

as it is in this case, because an Internet retailer can discretely choose whether to source a product
from in-stock inventory or from an upstream member of the supply chain.

3.3. Sample

Data collection was carried out through an automated Internet agent that fetched data on
product pricing, inventory status, and popularity ranking from both Internet retailersÕ web sites.
To ensure that order cycles are comprehensively captured, data were continuously collected from
both retailing sites over a 30-day period. The book sampling procedure used follows that em-
ployed by Brynjolfsson and Smith (2000). As summarized in the Appendix A, the books included
47 best sellers and 51 randomly selected books, based on their subject, popularity rank, and date
of release. In total, 53 different publishing firms are represented in the sample. Furthermore, title-
release dates necessary for the measurement of VINTAGE in the empirical model were collected
from data provided in 2002 by Baker and Taylor, a wholesale-book distributor and a supplier
to Amazon.com and Barnesandnoble.com. The descriptive statistics for our data are shown in
Table 1.
Of the 64,264 possible observations for each retailer, more than half of the automated queries
resulted in usable observations. For Amazon.com, there were 33,649 observations where all vari-
ables were captured. Many of the unusable observations were a result of observations that did not
contain information on merchandise sales rank. This is because Amazon.com does not have sales
rank data for some of the more obscure titles since those titles may have too few sales over the
past few months to warrant a reasonable measure of sales rank. Of the 64,264 observations,
55,982 observations were in stock and 8,279 were dropshipped. Titles in 1,429 observations were
not available for sale at all and none of these observations were usable in the final model. The
percentage of usable observations for Barnesandnoble.com was noticeably higher––there were
60,676 usable observations. This is because Barnesandnoble calculates sales rank information

Table 1
Descriptive statistics
Variable Observations Mean Standard deviation Minimum Maximum
Amazon.com
INSTOCK 64,264 0.871125 0.335064 0 1
POPULAR 34,295 8.44522 2.575607 13.724 0
VINTAGE 64,264 5.39627 1.124054 2.833213 8.074338
PRICE 63,032 16.90021 8.424122 2.99 72.5
DAY 64,264 15.44968 8.36861 1 30
HOUR 64,264 11.54399 6.975781 0 23
Barnesandnoble.com
INSTOCK 64,264 0.899088 0.301214 0 1
POPULAR 60,703 7.79174 2.658559 13.2883 0
VINTAGE 64,264 5.39627 1.124054 2.833213 8.074338
PRICE 62,848 18.64139 8.583386 2.99 72.5
DAY 64,264 15.44968 8.36861 1 30
HOUR 64,264 11.54399 6.975781 0 23
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 265

Table 2
Correlation matrix: Amazon.com (Panel A) and Barnesandnoble.com (Panel B)
INSTOCK POPULAR VINTAGE PRICE DAY HOUR
Panel A
INSTOCK 1.0000
POPULAR 0.4194** 1.0000
VINTAGE 0.3036** 0.5768** 1.0000
PRICE 0.1832** 0.1586** 0.1164** 1.0000
DAY 0.026 0.025** 0.0451** 0.0013 1.0000
HOUR 0.0015 0.0007 0.0016 0.0005 0.0462** 1.0000
Panel B
INSTOCK 1.0000
POPULAR 0.3434** 1.0000
VINTAGE 0.2618** 0.7216** 1.0000
PRICE 0.0837** 0.0311** 0.1572** 1.0000
DAY 0.0212** 0.0156** 0.0451** 0.014** 1.0000
HOUR 0.0012 0.001 0.0016 0.0003 0.0462** 1.0000
**
p < 0.01.

even for the most obscure titles. Of the 64,264 observations, 57,779 observations were in stock and
5,056 were dropshipped. A total of 1,429 observations were not available for sale at all (the same
number as Amazon.com) and none of these observations were used in the final model.
The correlation matrices for Amazon.com and Barnesandnoble.com are presented in Table 2
Panel A and Panel B. There is significant correlation between the merchandise vintage and pop-
ularity for both Internet book retailers. The correlation of these two variables for Barnesandno-
ble.com is particularly large, 0.7216. The fact that these variables are correlated is not
surprising. As CDs spend more time in the market, it is more likely to observe shrinking demand
for these products since there is increased availability of used items and the mass market value of
most of these information-intensive items decreases over time. This significant correlation coeffi-
cient has potential multicollinearity connotations that were addressed within the logit model.

4. Results

The results of two logit models––one for Amazon.com and one for Barnesandnoble.com––are
shown in Table 3. The overall fit of these models is fairly good with an R-squared of 30% and 23%
for Amazon.com and for Barnesandnoble.com, respectively.
The results support Hypothesis 1. For both the Amazon.com and the Barnesandnoble.com
models, the coefficient for POPULAR is positive and statistically significantly different from zero
(0.05-level). This indicates that as merchandise items become increasingly popular, Internet retail-
ers are more likely to rely on inventory speculation and hold these items in their own stocking
facilities.
Hypothesis 2 is also supported. For both the Amazon.com and Barnesandnoble.com
models, the coefficient for VINTAGE is negative and statistically significantly different from zero
266 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

Table 3
Model results
Retailer Amazon.com Barnesandnoble.com
Dep. variable INSTOCK INSTOCK
POPULAR 0.6208883** 0.384247**
VINTAGE 0.1464685** 0.4136311**
PRICE 0.0076773** 0.0321517**
DAY 0.0278899** 0.008407**
HOUR 0.0027892** 0.0007167
Constant 8.415936** 7.674478**
N 33,649 60,676
R2 0.2998 0.2251
**
p < 0.01.

(0.05-level). This indicates that as a book spends more time on the market, an Internet retailer is
less likely to use inventory speculation.
The results partially support Hypothesis 3. Because the PRICE coefficient is negative and sta-
tistically significantly different from zero (0.05-level) in the Amazon.com model, it is in line with
Hypothesis 3. However, this same coefficient has an opposite sign in the Barnesandnoble.com
model. The fact that Hypothesis 3 only holds for Amazon.com may be a result of the fact that
Barnesandnoble.com operates a physical sales channel in addition to their Internet sales channel.
We will explore this point further in the next section.

5. Discussion

The rise of the Internet has enabled sellers to leverage their supply chains in a way that allows
them to reduce their inventory management costs without jeopardizing consumer service levels.
This paper helps Internet retailers in this endeavor by providing empirical insights into the
dynamics of inventory postponement as a function of intrinsic merchandise attributes. To that
end, the paper develops an empirical model to study inventory speculation and postponement
decisions of Internet book retailers under two corresponding strategies: in-stock inventory reli-
ance and dropshipped inventory reliance. Furthermore, the model uses an inventory management
function that endogenizes product price and merchandise vintage and popularity––a measure used
by many Internet retailers as a pricing and inventory gauge.
Our empirical testing of inventory management theory on inventory speculation and inventory
postponement gives critical insight into the inventory management practices of Internet retailers.
Since Internet retailers are able to decouple the location of their merchandise with the location of
their consumers, they may be able to use inventory practices other than inventory speculation. In
this paper, we find that two key merchandise features––popularity and vintage––are driving forces
in Internet retailersÕ decisions to postpone their inventory. Leading Internet retailers are more
likely to manage inventory under a postponement policy for their less popular and highly dated
merchandise.
Surprisingly, mixed results for Hypothesis 3 suggest that there may be a difference between a
‘‘pure play’’ and a ‘‘bricks and clicks’’ Internet retailer. Our Internet retailer that is ‘‘pure
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 267

play’’––meaning that it does not have a physical sales channel––is Amazon.com. As hypothesized,
this Internet retailer is less likely to source merchandise from its own inventory as productsÕ prices
increase. However, the finding is exactly the opposite for Barnesandnoble.com, a ‘‘bricks and
clicks’’ retailer operating both a physical and an Internet sales channel. Barnesandnoble.com
may have higher priced items in inventory already resident at its retail stores and at its distribution
centers serving those retail outlets. Also, Barnesandnoble.com may be more prone to attract and
direct consumers who are willing to purchase high-priced items to retail outlets that are near the
consumersÕ locations in return for an opportunity to bypass the shipping and handling process
and receive a more instantaneous gratification.
Differences between the Amazon.com and Barnesandnoble.com data may also underscore the
importance of market share in determining differences in inventory management practices. As de-
scribed in Bailey and Rabinovich (2005), the market share of an Internet retailer is an important
determinant of its use of inventory speculation. As their analytical model shows, increased market
share increases the reliance on dropshipping. This may help explain this surprising result in our
empirical model: Barnesandnoble.com, with its smaller market share, may have to rely more heav-
ily on its in-stock inventory for high-priced books while Amazon.com can use dropshipping as a
close substitute because of the scale they achieve with their larger market share.
Further evidence of the impact of market share on Amazon.comÕs and Barnedandnoble.comÕs
reliance on inventory postponement and speculation across all of their merchandise may be inter-
preted from the constants in the logit regressions. While Amazon.comÕs constant is 8.42, Barne-
sandnoble.comÕs is 7.67. Thus, Amazon.com relies more heavily on in-stock inventory for all of its
merchandise than Barnesandnoble.com. This insight supplements the findings by Bailey and
Rabinovich (2005).
These findings are also a relevant addition to knowledge in transportation and logistics. First,
the results extend the literature from non-Internet contexts to the Internet retailing context where
the possible use of inventory postponement is much greater. Second, the results highlight that
Internet retailers are likely to adopt complex inventory management practices that incorporate
merchandise attributes into their decision of whether or not to keep a product in inventory. Spe-
cifically, determinants such as merchandise popularity, vintage, and price all affect the likelihood
of using inventory speculation. Finally, the paper describes how some firms that combine an Inter-
net channel with a physical channel may develop different inventory management practices than
those firms that rely solely on the Internet medium to transact with consumers.
Future research may build on this study by examining firms in Internet retailing markets
beyond books. Although there are many unique characteristics about the book market that
make it attractive (e.g., product homogeneity and fairly standard inventory holding costs and
sourcing policies), this research could be extended to other settings. For instance, research
may consider SKUs with mutually dependent demand (e.g., desktops and printers) and examine
Internet retailer decisions to kit these merchandise items into inventory postponement or spec-
ulation decisions. Research focusing on electronics and other products subject to highly dynamic
demand conditions could examine the impact of these additional demand uncertainty factors on
inventory speculation decisions. We would expect that, as a whole, Internet retailers in this con-
text will be more likely to meet consumersÕ demand by sourcing merchandise from their suppli-
ersÕ inventory in order to minimize obsolescence risks and utilize salvage channels more
efficiently.
268 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

Moreover, as other Internet book retailers consider listing merchandise popularity informa-
tion, the set of firms may be expanded to see how a firm that does not have a sizable portion
of the Internet book market implements its inventory management policies. We would expect
to find a greater reliance on dropshipped inventory by firms with a decreasingly dominant
presence in online retail markets. These firms are likely to seek inventory management resources
to supplement their own in order to offer a competitive inventory selection at competitive
prices.

Acknowledgements

We would like to thank Curtis Grimm at the University of Maryland, the participants of the
2001 Annual Meeting of the Decision Sciences Institute in San Francisco, CA and the 2002
Supply Chain Management Seminar Series at Arizona State University, and two anonymous
Transportation Research (E) reviewers and the Editor in Chief for their suggestions. This
work was supported in part by the National Science Foundation under grant number
DMI9908137.

Appendix A. Merchandise books

Book ISBN List Release Supplier Amazon average BN average

price ($) date popularity rank popularity rank
0446527785 23.95 9/1/01 Warner Books 2,234.35 975.34
0786868090 21.95 10/1/01 Hyperion 945.39 873.98
0375504397 28.95 9/1/01 Random House 1,349.48 951.37
0679454497 26.95 10/1/01 Alfred a Knopf Inc. 2,411.83 1,022.37
0374100128 26.00 9/1/01 Farrar Straus & Giroux 3,361.87 1,006.69
0399147799 23.95 10/1/01 Putnam Pub. Group 7,084.07 1,335.90
0553110845 27.95 10/1/01 Spectra 3,740.08 1,355.50
0525945814 24.95 10/1/01 E P Dutton 5,019.21 1,085.30
0375407375 24.00 10/1/01 Alfred a Knopf Inc. 5,699.01 1,746.48
006019832X 25.00 11/1/01 William Morrow & Co. 22,040.27 5,205.29
039914739X 26.95 9/1/01 Putnam Pub. Group 8,133.38 1,034.19
0399148248 25.95 10/1/01 Putnam Pub. Group 6,570.04 1,120.58
0670030198 10.95 10/1/01 Viking Press 5,282.39 2,247.88
0425181685 22.95 10/1/01 Berkley Pub. Group 2,393.45 1,297.26
0671047337 25.00 10/1/01 Pocket Books 5,137.74 1,259.13
0345397665 26.95 9/1/01 Del Rey 3,782.37 1,257.11
0765300265 29.95 11/1/01 Tor Books 3,000.54 1,024.53
0786868031 23.95 1/1/02 Hyperion 10,238.22 5,267.51
0525946284 26.95 12/1/01 E P Dutton 3,328.51 1,036.82
0425183610 20.95 12/1/01 Berkley Pub. Group 41,549.19 4,808.50
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 269

Appendix A (continued)
Book ISBN List Release Supplier Amazon average BN average
price ($) date popularity rank popularity rank
0446527297 25.95 1/1/02 Warner Books 3,580.75 727.74
0394555090 35.00 12/1/01 Random House 116.54 548.05
0446529540 24.95 11/1/01 Warner Books 43,824.98 9,843.84
0316181412 26.95 1/1/02 Little Brown & Co. 12,529.74 23,031.87
081257558X 7.99 1/1/02 Forge 1,352.56 596.52
0446678430 17.95 1/1/02 Warner Books 666.92 790.34
0451204530 7.99 11/1/01 Signet 17,565.48 1,406.38
0375726497 13.00 8/1/01 Alfred a Knopf Inc. 298,887.33 92,429.71
0743420373 7.99 12/1/00 Pocket Books 693.93 2,322.59
0965485609 18.95 6/1/97 Home User Press 4,386.02 8,489.14
1570671036 16.95 9/1/00 Book Pub. Co. 3,365.92 9,093.85
185302967X 22.95 6/1/01 Jessica Kingsley 2,417.94 6,725.91
0521635039 48.00 12/1/00 Cambridge Univ. Press 9,825.69 –
0062731025 16.00 8/1/93 Harper Collins 1,513.97 3,387.02
0684810352 26.00 9/1/96 Simon & Schuster 1,280.05 713.33
0375752528 8.95 10/1/98 Modern Library 179,418.29 309,094.56
084232853X 14.99 1/1/99 Tyndale House Pub. 225,415.31 311,668.57
0736411933 2.99 7/1/01 Disney Books 244,528.05 476,648.66
0385326653 15.95 4/1/00 Delacorte Press 41,180.96 74,332.14
0140286411 12.95 5/1/00 Penguin 252,819.40 572,167.17
0684862360 25.00 11/1/01 Free Press 23,543.54 1,027.80
044023655X 5.99 9/1/01 Dell Pub. 3,640.82 2,489.65
1862047049 16.95 7/1/00 Element Books Ltd. 726,455.31 390,010.86
0939217414 8.99 1/1/01 Peel Productions 363,037.59 179,415.39
0471181889 19.95 3/1/97 John Wiley & Sons 25,549.55 210,397.49
0471384550 19.95 8/1/00 John Wiley & Sons 3,352.57 41,984.73
0471595284 16.95 9/1/93 John Wiley & Sons 21,166.27 33,583.57
047128369X 17.95 10/1/98 John Wiley & Sons 4,271.42 8,346.48
0071349014 45.00 9/1/00 McGraw Hill 592,705.75 232,040.40
015202591X 16.00 4/1/01 Harcourt Inc. 6,151.47 18,131.27
0152163778 12.95 10/1/01 Harcourt Inc. 96,572.23 2,658.26
1579890342 14.95 2/1/00 Sirius Entertainment Inc. 255,348.29 362,454.55
1570544077 12.95 9/1/99 Klutz Press 10,570.80 –
0823001105 29.95 12/1/00 Watson-Guptill Pubns 260,517.21 248,740.68
0914955365 19.95 8/1/97 Lotus Press 52,925.32 266,589.16
0345444884 7.99 7/1/01 Ballantine Books 5,030.45 1,253.67
0786867345 24.95 8/1/01 Hyperion 4,989.70 1,590.60
079227721X 17.95 3/1/01 Natl Geographic 294,693.48 283,845.87
0275944751 72.50 11/1/96 Praeger Pub. 921,884.77 –
(continued on next page)
270 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271

Appendix A (continued)
Book ISBN List Release Supplier Amazon average BN average
price ($) date popularity rank popularity rank
4770020325 25.00 6/1/96 Kodansha 663,299.92 –
0738801836 31.99 12/1/98 Xlibris Corp. 761,624.65 581,354.05
0440416051 15.95 4/1/00 Delacorte Press 40,229.32 20,230.66
0375411070 25.95 1/1/02 Alfred a Knopf Inc. 1,208.03 712.39
039914675X 23.95 1/1/02 Putnam Pub. Group 3,142.07 1,060.23
0786868015 22.95 1/1/02 Hyperion 7,707.41 –
0670030643 23.95 1/1/02 Viking Press 2,061.27 630.44
0399148469 24.95 2/1/02 Putnam Pub. Group 2,524.14 772.99
0786869429 14.70 1/1/02 Hyperion 2,613.93 172.99
0385505833 19.95 11/1/01 Doubleday 244.32 420.93
0786868139 23.95 2/1/02 Talk Miramax Books 2,515.14 1,302.85
0345443004 26.00 1/1/02 Del Rey 2,179.35 1,459.50
0385503822 27.95 2/1/02 Doubleday 39.31 18.00
0385501412 24.95 2/1/02 Doubleday 3,417.82 1,073.97
0060008725 25.95 2/1/02 William Morrow & Co. 2,112.94 909.45
0399147888 26.95 1/1/02 Putnam Pub. Group 3,381.05 1,155.80
0446516570 26.95 1/1/02 Warner Books 172.32 280.27
0553107445 24.95 2/1/02 Bantam Doubleday Dell 2,898.29 1,193.32
0374129983 26.00 9/1/01 Farrar Straus & Giroux 177.80 143.78
0385335520 26.95 2/1/02 Delacorte Press 1,076.69 293.70
034544003X 25.00 2/1/02 Ballantine Books 2,293.62 843.00
0385336187 24.95 2/1/02 Delacorte Press 2,674.63 2,130.50
0316693200 26.95 3/1/02 Little Brown & Co. 47.17 22.63
0399148515 25.95 2/1/02 Putnam Pub. Group 1,470.47 501.31
0312278586 24.95 3/1/02 St. Martins Press 2.21 2.18
0385503954 26.00 3/1/02 Doubleday 4.03 11.50
1551668904 19.95 3/1/02 Harlequin Sales Corp 7,820.59 4,762.84
0743221990 25.00 3/1/02 Simon & Schuster 958.81 68.66
0399147853 27.95 3/1/02 Putnam Pub. Group 1,749.41 1,303.48
0743235150 28.00 3/1/02 Scribner 35.17 24.87
0380978555 25.95 4/1/02 William Morrow & Co. 3,098.83 428.26
0399148450 24.95 3/1/02 Putnam Pub. Group 826.81 77.56
0553800973 24.95 3/1/02 Bantam Doubleday Dell 1,817.69 117.93
0345435273 23.95 3/1/02 Ballantine Books 1,218.27 361.37
0786869445 14.95 4/1/02 Hyperion 493.93 56.92
0399148337 25.95 4/1/02 Putnam Pub. Group 2,005.01 377.01
039914840X 25.95 4/1/02 Putnam Pub. Group 240.69 47.39
0446530085 24.95 4/1/02 Warner Books 89.30 32.02
0446529788 19.95 4/1/02 Warner Books 2,928.42 454.66
 J.P. Bailey, E. Rabinovich / Transportation Research Part E 42 (2006) 258–271 271

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