Optimal inventory decisions for a risk-averse retailer when offering layaway

Abstract

Layaway allows economically disadvantaged budget-constrained consumers to purchase expensive items through amortized payments and nominal program fees, as opposed to using high-interest financing options such as credit cards and payday loans. We consider a risk-averse retailer’s ordering decisions when offering a layaway program. We use the net loss and total loss functions, found in the literature, to determine a risk-averse retailer’s optimal order quantity under conditional value-at-risk (CVaR). We next analyze the effects of the model parameters, retailer’s risk aversion, the market default rate, enrollment fee, cancellation fee and so on, on the optimal order quantity decisions. We show that the optimal order quantity depends on different loss functions and different demand distribution functions. Further, we show that as market default rate increases or the retailer becomes more risk averse, then a rational retailer will not offer a layaway program.