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Price and Inventory Dynamics in an Oligopoly Industry: A Framework for Commodity Markets

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  • Steinmetz Alexander

    (University of Applied Sciences Würzburg-Schweinfurt, Münzstraße 12, 97070 Würzburg, Germany)

Abstract

This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S,s)$$(S, s)$$ order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Additionally, with strategic competition in prices, (S,s)$$(S, s)$$ inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.

Suggested Citation

  • Steinmetz Alexander, 2016. "Price and Inventory Dynamics in an Oligopoly Industry: A Framework for Commodity Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(1), pages 159-180, January.
    • Handle: RePEc:bpj:bejtec:v:16:y:2016:i:1:p:159-180:n:8
    DOI: 10.1515/bejte-2014-0064
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    References listed on IDEAS

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    1. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 275-308.
    2. Paul Ellickson & Beresteanu Arie, 2005. "The Dynamics of Retail Oligopolies," 2005 Meeting Papers 829, Society for Economic Dynamics.
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