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Inventories, Stock-Outs, and Production Smoothing

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Andrew B. Abel

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Abstract

If stock-outs are ignored and if demand shocks are additive, then optimal behavior requires that the marginal cost of production (MC) be equated with the expected marginal revenue of increasing expected sales by one unit (EMR). However,with more general demand shocks (and still ignoring stock-outs), the excess of MC over EMP has the same signas the covariance of the slope of the demand curve and the marginal valuation of inventory. The equality of EMR and MC is also broken by taking account of stock-outs, even if demand shocks are additive. If there is a production lag, then taking account of stock-outs implies that optimal behavior will be characterized by production smoothing even if the cost of production is linear. Two alternative definitions of production smoothing are presented and optimal behavior in the presence of stock-outs displays each type of smoothing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1563.

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Date of creation: Sep 1985
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Handle: RePEc:nbr:nberwo:1563

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September. [Downloadable!] (restricted)
  2. Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January. [Downloadable!] (restricted)
  3. Zabel, Edward, 1972. "Multiperiod monopoly under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 524-536, December. [Downloadable!] (restricted)
  4. Schutte, David P, 1983. "Inventories and Sticky Prices: Note," American Economic Review, American Economic Association, vol. 73(4), pages 815-16, September. [Downloadable!] (restricted)
  5. Alan S. Blinder, 1983. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Reagan, Patricia B, 1982. "Inventory and Price Behaviour," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 137-42, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Katsuyuki Shibayama, 2008. "Inventory Cycles," Studies in Economics 0804, Department of Economics, University of Kent. [Downloadable!]
  2. Yi Wen, 2005. "The multiplier: a general equilibrium analysis of multi-stage-fabrication economy with inventories," Working Papers 2005-046, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. Wen, Yi, 2004. "General Equilibrium Analysis of the Supply of Capital," Working Papers 04-02, Cornell University, Center for Analytic Economics. [Downloadable!]
  4. Bayle-Tourtoulou, Anne-Sophie & Laurent, Gilles & Macé, Sandrine, 2006. "Assesing the frequency and clauses of out-of-stock events through store scanner data," Les Cahiers de Recherche 830, HEC Paris. [Downloadable!]
  5. Marcel Fafchamps Jan Willem Gunning & Remco Oostendorp, . "Inventories, Liquidity, and Contractual Risk in African Manufacturing," Working Papers 97020, Stanford University, Department of Economics. [Downloadable!]
  6. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Wen, Yi, 2004. "Durable Goods Inventories and the Volatility of Production: Explaining the Less Volatile U.S. Economy," Working Papers 04-01, Cornell University, Center for Analytic Economics. [Downloadable!]
    Other versions:
  8. Wen, Yi, 2003. "Understanding the Inventory Cycle: I. Partial Equilibrium Analysis," Working Papers 03-08, Cornell University, Center for Analytic Economics. [Downloadable!]
  9. Yi Wen, 2008. "Inventories, liquidity, and the macroeconomy," Working Papers 2008-045, Federal Reserve Bank of St. Louis. [Downloadable!]
  10. Yi Wen, 2005. "Production and inventory behavior of capital," Working Papers 2005-044, Federal Reserve Bank of St. Louis. [Downloadable!]
  11. Wen, Yi, 2003. "The Power of Demand: A General Equilibrium Analysis of Multi-Stage-Fabrication Economy with Inventories," Working Papers 03-13r, Cornell University, Center for Analytic Economics. [Downloadable!]
  12. George Hall & John Rust, 1999. "An Empirical Model of Inventory Investment by Durable Commodity Intermediaries," Macroeconomics 9904005, EconWPA. [Downloadable!]
    Other versions:
  13. Yi Wen, 2009. "Input and output inventory dynamics," Working Papers 2008-008, Federal Reserve Bank of St. Louis. [Downloadable!]
  14. Jeffrey A. Miron & Stephen P. Zeldes, 1989. "Seasonality, Cost Shocks, and the Production Smoothing Model of Inventories," NBER Working Papers 2360, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Wen, Yi, 2003. "Durable Goods Inventories and the Volatility of Production: A Puzzle," Working Papers 03-12, Cornell University, Center for Analytic Economics. [Downloadable!]
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