The Impact Of Supply Learning On Customer Demand: Model And Estimation Methodology

To set service levels, firms must understand how changes in service affect customer demand. Supply learning is a process whereby customers use past supplier performance to build beliefs about supplier capabilities and hence about future supplier performance. This paper presents a multi-period model of service level competition among suppliers selling substitutable products to a customer that engages in supply learning. They observe how a supplier's service level performance molds a customer's beliefs as well as how a customer's beliefs affect its order quantities.