Strategic inventories under limited commitment

Abstract

In a dynamic storable good market where demand changes over time, we investigate the producer's strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producer's profitability, particularly when the producer cannot commit to future prices. We show that the producer's inventories act as a strategic device to mitigate the loss from the lack of commitment. Our results provide a rationale for the producer's inventory behavior that sheds new light on the well-documented empirical evidence about inventories.

Storable Good Market With Intertemporal Cost Variations

“…In the current paper, we explore an alternative legitimate reason for time-varying prices, namely, intertemporal variations in the firm's production costs. As discussed in Section 9, our significantly different results provide a complementary picture to Dudine et al (2006) and Antoniou and Fiocco (2019), which can contribute to the analysis of dynamic strategic interactions in storable good markets. In a model à la Dudine et al (2006) with time-dependent buyer valuations, Berbeglia et al (2019) characterize the optimal preannounced pricing policy and the optimal contingent pricing policy for a monopolistic retailer that sells indivisible items either to a finite number of buyers with unit demand or to a single buyer with arbitrary demand per period.…”

“…As a result, the firm's lack of commitment reduces consumer surplus and the firm's profits, which is definitely welfare detrimental. In this setting, Antoniou and Fiocco (2019) show that a firm with limited commitment powers has strategic incentives to hold inventories when facing the possibility of buyer stockpiling. Inventory accumulation mitigates the firm's loss from the lack of commitment.…”

“…shown by Antoniou and Fiocco (2019) in the context of a growing market, a firm with limited commitment powers can exhibit strategic incentives to hold inventories in order to credibly affect its future price. In our setting, consumer storage can still emerge in equilibrium, particularly when convex production costs or capacity constraints prevent the firm from covering the entire future demand.…”

“…As discussed in Section 7, our study is closely related to the seminal article of Dudine et al (2006), which considers a monopoly storable good market where demand varies deterministically over time. In this setting, Antoniou and Fiocco (2019) show that a firm with limited commitment powers has strategic incentives to hold inventories when facing the possibility of buyer stockpiling. In this article, adopting a supplyside perspective, we explore intertemporal cost variations as an alternative legitimate reason for dynamic pricing and obtain significantly different results.…”

Group Buying of Competing Retailers with Strategic Inventory

“…Moon et al [39] present a twoperiod supply chain model under demand induced by selling price and investment effort in the presence of strategic inventory. Antoniou and Fiocco [40] investigate a producer's strategic incentive to hold inventory in response to the possibility of buyer stockpiling. Roy et al [41] investigate the implication of a lack of observability on the use of strategic inventory in a supply chain consisting of a retailer and a manufacturer.…”