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Communication and Inventory as Substitutes in Organizing Production

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  • Milgrom, Paul
  • Roberts, John

Abstract

A major organizational design decision for manufacturing firms is t he extent to which production should be to stock versus to order: inventories and communication with customers are substitutes. The authors show that profits are convex in the share of the market supplied from inventory. Thus, firms will tend to specialize in one mode of organization. The authors examine how this choice depends on market size, the level and variability of demand, the costs of communication, price levels, production costs, and the costs of expanding product lines. The results are consistent with observed patterns in several industries. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Milgrom, Paul & Roberts, John, 1988. " Communication and Inventory as Substitutes in Organizing Production," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 275-289.
  • Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:275-89
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    References listed on IDEAS

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    1. Ernst Fehr & Urs Fischbacher, "undated". "Third Party Punishment and Social Norms," IEW - Working Papers 106, Institute for Empirical Research in Economics - University of Zurich.
    2. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    3. Barton H. Hamilton & Jack A. Nickerson & Hideo Owan, 2003. "Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 465-497, June.
    4. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-477, June.
    5. Bård Harstad, 2005. "Majority Rules and Incentives," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1535-1568.
    6. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-636, May.
    7. George A. Akerlof & Rachel E. Kranton, 2000. "Economics and Identity," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 715-753.
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