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Demand Uncertainty, Inventories, and Resale Price Maintenance

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  • Raymond Deneckere
  • Howard P. Marvel
  • James Peck

Abstract

We show that a manufacturer facing uncertain demand and selling through a competitive retail market may wish to support adequate retail inventories by preventing the emergence of discount retailers. In our model, discounters offer low prices made possible by low probability of being saddled with unsold inventories in the event of slack demand. Full-price retailers are compensated for a higher probability of unsold inventories by a higher retail price when they sell. We show that preventing discounting increases the manufacturer's wholesale demand and profits, and we delineate demand conditions under which equilibrium inventory holding and consumer welfare increase.

Suggested Citation

  • Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 885-913.
    • Handle: RePEc:oup:qjecon:v:111:y:1996:i:3:p:885-913.
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