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Inventory Commitment and Monetary Compensation Under Competition

Author

Listed:
  • Junfei Lei

    (INSEAD, 77300 Fontainebleau, France)

  • Fuqiang Zhang

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Renyu Zhang

    (CUHK Business School, The Chinese University of Hong Kong, Hong Kong)

  • Yugang Yu

    (School of Management, University of Science and Technology of China, Hefei 230026, China)

Abstract

Problem definition : Inventory commitment and monetary compensation are widely recognized as effective strategies in monopoly settings when customers are concerned about stockouts. To attract more customer traffic, a firm reveals its inventory availability information to customers before the sales season or offers monetary compensation to placate customers if the product is out of stock. This paper investigates these two strategies when retailers compete on both price and inventory availability. Methodology/results : We develop a game-theoretic framework to analyze the strategic interactions among the retailers and customers and draw the following insights. First, both inventory commitment and monetary compensation may lead to a prisoner’s dilemma. Although these strategies are preferred regardless of the competitor’s price and inventory decisions, the equilibrium profit of each retailer could be lower in the presence of inventory commitment or monetary compensation because they intensify the competition between the retailers. Second, we find that market competition may hurt social welfare compared with a centralized setting by reducing the product availability in equilibrium. The inventory commitment and monetary compensation strategies further intensify the competition between the retailers, therefore causing an even lower social welfare. Managerial implications : Our study shows that, although inventory commitment and monetary compensation improve retailers’ profit and social welfare under monopoly, these strategies should be used with caution under competition.

Suggested Citation

  • Junfei Lei & Fuqiang Zhang & Renyu Zhang & Yugang Yu, 2023. "Inventory Commitment and Monetary Compensation Under Competition," Manufacturing & Service Operations Management, INFORMS, vol. 25(6), pages 2142-2159, November.
    • Handle: RePEc:inm:ormsom:v:25:y:2023:i:6:p:2142-2159
    DOI: 10.1287/msom.2021.0411
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