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Vertical Control of Price and Inventory

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Author Info
Harish Krishnan
Ralph A. Winter

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Abstract

This paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain. We consider an upstream manufacturer selling to two outlets, which compete as differentiated duopolists and face uncertain demand. Demand spillovers between the outlets arise in the event of stockouts. The price mechanism, in which each outlet pays a two-part price and chooses price and inventory, virtually never coordinates incentives efficiently. Contracts that can elicit first-best decisions include resale price floors or buy-back policies (retailer-held options to sell inventory back to the manufacturers). (JEL D21, L13, L14, M11)

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File URL: http://hdl.handle.net/10.1257/aer.97.5.1840
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=5&article=13&issue_date=December2007
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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 5 (December)
Pages: 1840-1857
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Handle: RePEc:aea:aecrev:v:97:y:2007:i:5:p:1840-1857

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This page was last updated on 2008-11-9.

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