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The Cyclical Behavior of Strategic Inventories

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  • Rotemberg, Julio J
  • Saloner, Garth

Abstract

This paper presents a model in which inventories are used by a duopoly to deter deviations from an implicitly collusive arrangement. Higher inventories allow firms to punish cheaters more strongly and can thus help to maintain collusion. The authors show that when demand is high, the incentive to deviate increases so that increases in inventories may be optimal for the duopoly. This rationalizes the observed positive correlation between inventories and sales. In their empirical section, the authors show that, as their model predicts, this correlation is more important in concentrated industries. They also provide several examples where inventories have been a factor in cartel behavior. Copyright 1989, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 104 (1989)
Issue (Month): 1 (February)
Pages: 73-97

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Handle: RePEc:tpr:qjecon:v:104:y:1989:i:1:p:73-97

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Cited by:
  1. Margaret Levenstein, 1993. "Vertical Restraints in the Bromine Cartel: The Role of Distributors in Facilitating Collusion," NBER Historical Working Papers 0049, National Bureau of Economic Research, Inc.
  2. Jean-Paul Chavas, 2008. "On Storage Behavior Under Imperfect Competition, with Application to the American Cheese Market," Review of Industrial Organization, Springer, vol. 33(4), pages 325-339, December.
  3. Thille, H., 2002. "Inventions & Price Volatility in a Cournot Duopoly," Working Papers 2002-4, University of Guelph, Department of Economics and Finance.
  4. J. Joseph Beaulieu & Jeffrey K. MacKie-Mason & Jeffrey A. Miron, 1991. "Why Do Countries and Industries with Large Seasonal Cycles Also Have Large Business Cycles?," NBER Working Papers 3635, National Bureau of Economic Research, Inc.
  5. Blazenko, George W. & Vandezande, Kirk, 2003. "Corporate holding of finished goods inventories," Journal of Economics and Business, Elsevier, vol. 55(3), pages 255-266.
  6. Aray, Henry & Gardeazabal, Javier, 2005. "Going Multinational under Exchange Rate Uncertainty," DFAEII Working Papers 2005-05, University of the Basque Country - Department of Foundations of Economic Analysis II.
  7. Paul Prisecaru, 2013. "Microeconomic Analysis In Competition Policy," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences & Institute for World Economy of the Romanian Academy, vol. 1(2), pages 50-61, November.
  8. Johri, Alok, 2001. "Markups and the Seasonal Cycle," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 367-395, July.
  9. Tribó, Josep A., 2009. "Firms' stock market flotation: Effects on inventory policy," International Journal of Production Economics, Elsevier, vol. 118(1), pages 10-18, March.
  10. Thille, Henry, 2006. "Inventories, market structure, and price volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1081-1104, July.
  11. Biglaiser, Gary & Vettas, Nikolaos, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers.
  12. Fine, Charles H. & Pappu, Suguna., 1990. "Flexible manufacturing technology and product-market competition," Working papers 3135-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  13. Pınar Keskinocak & Kasarin Chivatxaranukul & Paul M. Griffin, 2008. "Strategic inventory in capacitated supply chain procurement," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 23-36.
  14. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
  15. Obermaier, Robert, 2012. "German inventory to sales ratios 1971–2005—An empirical analysis of business practice," International Journal of Production Economics, Elsevier, vol. 135(2), pages 964-976.
  16. Kazuhiro Ohnishi, 2011. "A Quantity-Setting Mixed Duopoly with Inventory Investment as a Coordination Device," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 109-119, May.

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