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Price and inventory dynamics in an oligopoly industry: A framework for commodity markets

  • Steinmetz, Alexander
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    This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S, s) order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Consequently, with strategic competition in prices, (S, s) inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.

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    File URL: http://econstor.eu/bitstream/10419/38816/1/625728882.pdf
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    Paper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 82.

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    Date of creation: 2010
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    Handle: RePEc:zbw:wuewep:82
    Contact details of provider: Postal: Sanderring 2, D-97070 Würzburg
    Phone: (0931) 31-2901
    Fax: (0931) 31-2101
    Web page: http://www.vwl.uni-wuerzburg.de/en/no_cache/lehrstuehle/vwl1/home/
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    1. Pindyck, Robert S., 1990. "Inventories and the short-run dynamics of commodity prices," Working papers 3133-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Dutta, Prajit K & Sundaram, Rangarajan, 1992. "Markovian Equilibrium in a Class of Stochastic Games: Existence Theorems for Discounted and Undiscounted Models," Economic Theory, Springer, vol. 2(2), pages 197-214, April.
    3. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, 05.
    4. George Hall & John Rust, 2007. "The (S,s) Policy is an Optimal Trading Strategy in a Class of Commodity Price Speculation Problems," Economic Theory, Springer, vol. 30(3), pages 515-538, March.
    5. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
    6. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    7. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
    8. Carter, Colin A & MacLaren, Donald, 1997. "Price or Quantity Competition? Oligopolistic Structures in International Commodity Markets," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 373-85, August.
    9. Ellickson, Paul, 2005. "Does Sutton Apply to Supermarkets?," Working Papers 05-05, Duke University, Department of Economics.
    10. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
    11. Kirman, Alan P & Sobel, Matthew J, 1974. "Dynamic Oligopoly with Inventories," Econometrica, Econometric Society, vol. 42(2), pages 279-87, March.
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