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Strategic Inventories Under Supply Chain Competition

Author

Listed:
  • Xi Li

    (College of Business, City University of Hong Kong, Kowloon, Hong Kong)

  • Yanzhi Li

    (College of Business, City University of Hong Kong, Kowloon, Hong Kong)

  • Ying-Ju Chen

    (School of Business and Management and School of Engineering, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

Abstract

Problem definition : We consider the effects of strategic inventory (SI) in the presence of chain-to-chain competition in a two-period model. Academic/practical relevance : Established findings suggest that SI may alleviate double marginalization and improve the efficiency of a decentralized distribution channel. However, no studies consider the role of SI under chain-to-chain competition. Methodology : We build a two-period model consisting of two competing supply chains, each with an upstream manufacturer and an exclusive retailer. The retailers compete on either price or quantity. We characterize the firms’ strategies under the concept of perfect Bayesian equilibrium. We consider cases where contracts are either observable or unobservable across supply chains. Results : (1) SI still exists under chain-to-chain competition. Retailers may carry more inventory when the competition becomes fiercer, which further intensifies the supply chain competition. (2) Different from the existing findings, SI may backfire and hurt all firms. Interestingly, firms may benefit from a higher inventory holding cost. (3) Under supply chain competition, the prisoner’s dilemma can arise if competition intensity is intermediate; in other words, manufacturers are better off without strategic inventory, and yet they cannot help allowing strategic inventory, which is the unique equilibrium. Managerial implications : Despite its appeal among firms of a single supply chain, the role of SI is altered or even reversed by chain-to-chain competition. Conventional wisdom on SI should be applied with caution.

Suggested Citation

  • Xi Li & Yanzhi Li & Ying-Ju Chen, 2022. "Strategic Inventories Under Supply Chain Competition," Manufacturing & Service Operations Management, INFORMS, vol. 24(1), pages 77-90, January.
    • Handle: RePEc:inm:ormsom:v:24:y:2022:i:1:p:77-90
    DOI: 10.1287/msom.2020.0954
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    1. repec:rbs:ijbrss:v:14:y:2026:i:9:p:32-41 is not listed on IDEAS
    2. Xolani Mwandla & Tshepo Mabotja & Elizabeth Chinomona, 2025. "Enhancing warehousing efficiency in the South African automotive sector: challenges and opportunities for supply chain optimization," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 14(9), pages 32-41, December.
    3. Ma, Chenglin & Pun, Hubert & Zhao, Ruiqing, 2026. "Strategic inventory of original products amid new product launches," European Journal of Operational Research, Elsevier, vol. 329(3), pages 878-889.
    4. Cai, Zhixuan & Deng, Tianhu & Tang, Christopher S., 2026. "Rational versus presumptive decisions in a decentralized co-production system: Solutions and applications," Omega, Elsevier, vol. 138(C).
    5. Luling Yan & Ping He & Xiaoping Xu & Jinqiang Chen & T. C. Edwin. Cheng, 2026. "Platform operations with strategic inventory and green technology under the regional carbon cap-and-trade scheme," Annals of Operations Research, Springer, vol. 359(2), pages 1821-1848, April.
    6. Zhen Chen & Kaveh Khalilpour & Rui Zhao, 2025. "Coordination of Risk‐Averse Behaviors in a Green Supply Chain‐to‐Chain Competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(5), pages 3142-3156, July.
    7. Ke, Wan & Zhou, Xiaoyang & Lev, Benjamin & Shen, Wenjing, 2025. "Strategic Inventory with an Unreliable Manufacturer across Multiple Supply Chain Structures," Omega, Elsevier, vol. 133(C).

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