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Inventory Dynamics and Supply Chain Coordination

Author

Listed:
  • Harish Krishnan

    () (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Ralph A. Winter

    () (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

Abstract

This paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting. A manufacturer distributes a product through retailers who compete on both price and fill rates. We show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions. When the product is highly perishable, retailers are biased toward excessive price competition and inadequate inventories. Vertical price floors or inventory buybacks (subsidies for unsold inventory) can coordinate incentives in both pricing and inventory decisions. When the product is less perishable, the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives.

Suggested Citation

  • Harish Krishnan & Ralph A. Winter, 2010. "Inventory Dynamics and Supply Chain Coordination," Management Science, INFORMS, vol. 56(1), pages 141-147, January.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:1:p:141-147
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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1100
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    References listed on IDEAS

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    1. Butz, David A, 1997. "Vertical Price Controls with Uncertain Demand," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 433-459, October.
    2. Fernando Bernstein & Awi Federgruen, 2005. "Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty," Management Science, INFORMS, vol. 51(1), pages 18-29, January.
    3. Katz, Michael L., 1989. "Vertical contractual relations," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 11, pages 655-721 Elsevier.
    4. Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 885-913.
    5. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.
    6. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2011. "The Effects Of Capacity On Sales Under Alternative Vertical Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 117-154, March.
    7. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1997. "Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition," American Economic Review, American Economic Association, vol. 87(4), pages 619-641, September.
    8. Dana, James D, Jr & Spier, Kathryn E, 2001. "Revenue Sharing and Vertical Control in the Video Rental Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 223-245, September.
    9. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring.
    10. V. G. Narayanan & Ananth Raman & Jasjit Singh, 2005. "Agency Costs in a Supply Chain with Demand Uncertainty and Price Competition," Management Science, INFORMS, vol. 51(1), pages 120-132, January.
    11. James D. Dana, Jr. & Nicholas C. Petruzzi, 2001. "Note: The Newsvendor Model with Endogenous Demand," Management Science, INFORMS, vol. 47(11), pages 1488-1497, November.
    12. Harish Krishnan & Ralph A. Winter, 2007. "Vertical Control of Price and Inventory," American Economic Review, American Economic Association, vol. 97(5), pages 1840-1857, December.
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    Citations

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    Cited by:

    1. Zhang, Qinhong & Dong, Ming & Luo, Jianwen & Segerstedt, Anders, 2014. "Supply chain coordination with trade credit and quantity discount incorporating default risk," International Journal of Production Economics, Elsevier, vol. 153(C), pages 352-360.
    2. Adler, Nicole & Hanany, Eran, 2016. "Regulating inter-firm agreements: The case of airline codesharing in parallel networks," Transportation Research Part B: Methodological, Elsevier, vol. 84(C), pages 31-54.
    3. Bakker, Monique & Riezebos, Jan & Teunter, Ruud H., 2012. "Review of inventory systems with deterioration since 2001," European Journal of Operational Research, Elsevier, vol. 221(2), pages 275-284.
    4. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    5. Antoniou, Fabio & Fiocco, Raffaele, 2017. "Strategic inventories under limited commitment," Working Papers 2072/306512, Universitat Rovira i Virgili, Department of Economics.
    6. repec:gam:jsusta:v:10:y:2018:i:3:p:821-:d:136443 is not listed on IDEAS

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