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The Role of Inventory in Delivery-Time Competition

Author

Listed:
  • Lode Li

    (Yale School of Organization and Management, Box 1A, New Haven, Connecticut 06520)

Abstract

The paper operationalizes the notion of shortage cost by considering the behavior of customers and competing firms and examines the role of inventory in response time competition. We start with a single-firm production control model in which customers are characterized by their preferences of price, quality and delivery time. The optimal production/inventory policy and the optimal choice between make-to-order and make-to-stock operations are determined in simple "newsboy"-like formulas. The basic model is then extended to an n-firm market game in which firms compete for orders from the aspect of early delivery. One could think of this setting as an oligopoly racing market. The analysis shows that competition can breed a demand for produce-to-stock, just as other economic phenomena such as economies of scale, uncertainty, or seasonality can induce make-to-stock, and that delivery-time competition increases the buyer's welfare while decreasing the producer's welfare.

Suggested Citation

  • Lode Li, 1992. "The Role of Inventory in Delivery-Time Competition," Management Science, INFORMS, vol. 38(2), pages 182-197, February.
    • Handle: RePEc:inm:ormnsc:v:38:y:1992:i:2:p:182-197
    DOI: 10.1287/mnsc.38.2.182
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