Should competing firms adopt early transshipment?

Transshipment has traditionally served as a passive mechanism to address inventory imbalances at the end of a selling season, where some locations face overstocking while others encounter shortages. In recent years, however, many firms have begun adopting earlier transshipment practices, reallocating inventory before such imbalances arise. This study examines the strategic implications of early transshipment in a competitive setting. We develop analytical models of two competing firms selling partially substitutable products, where each firm makes in-house quantity decision prior to the realization of demand uncertainty. By employing responsive pricing, which allows price adjustment after uncertainty is resolved, inventory imbalances can be fully avoided, rendering passive transshipment unnecessary. If transshipment is permitted earlier—either preventively (after uncertainty resolution but before pricing) or proactively (jointly with quantity decisions)—it assumes additional strategic roles beyond ex-post stock balancing. Early transshipment facilitates cost savings under mild competition and enhances market efficiency under intense competition, with proactive transshipment yielding the highest expected profits across both deterministic and stochastic market conditions. However, early transshipment may reduce consumer surplus especially when competition is intense, due to its effect in mitigating price competition and elevating average selling prices. When responsive pricing is infeasible (fixed pricing), passive transshipment remains essential and regains its advantage through risk pooling. Under high demand uncertainty, early transshipment may not necessarily occur, whereas passive transshipment can lead to superior profitability for firms.