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A Theory of Intermediation in Supply Chains Based on Inventory Control


  • QU, Zhan
  • RAFF, Horst
  • SCHMITT, Nicolas


The paper shows that taking inventory control out of the hands of retailers and assigning it to an intermediary increases the value of a supply chain when demand volatility is high. This is because an intermediary can help solve two incentive problems associated with retailersi inventory control and thereby improve the intertemporal allocation of inventory. Adding an intermediary as a new link in a supply chain is also shown to reduce total inventory, to make shipments from the manufacturer less frequent and more variable in size, as well as to reduce social welfare.

Suggested Citation

  • QU, Zhan & RAFF, Horst & SCHMITT, Nicolas, 2016. "A Theory of Intermediation in Supply Chains Based on Inventory Control," Discussion paper series HIAS-E-40, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
  • Handle: RePEc:hit:hiasdp:hias-e-40

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    References listed on IDEAS

    1. Kropf, Andreas & Sauré, Philip, 2014. "Fixed costs per shipment," Journal of International Economics, Elsevier, vol. 92(1), pages 166-184.
    2. Taylor Randall & Serguei Netessine & Nils Rudi, 2006. "An Empirical Examination of the Decision to Invest in Fulfillment Capabilities: A Study of Internet Retailers," Management Science, INFORMS, vol. 52(4), pages 567-580, April.
    3. Andrew J. Clark & Herbert Scarf, 2004. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, vol. 50(12_supple), pages 1782-1790, December.
    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. 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.
    6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    7. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
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    More about this item


    intermediation; inventory; demand volatility; supply chain;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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