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Inventory Sharing and Rationing in Decentralized Dealer Networks

Author

Listed:
  • Hui Zhao

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Vinayak Deshpande

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Jennifer K. Ryan

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

Abstract

An increasing number of manufacturers have started to pursue a strategy that promotes inventory sharing among the dealers in their distribution network. In this paper we analyze a decentralized dealer network in which each independent dealer is given the flexibility to share his inventory. We model inventory sharing as a multiple demand classes problem in which each dealer faces his own customer demand with high priority, and inventory-sharing requests from other dealers with low priority. Assuming that each dealer uses a base-stock and threshold-rationing policy for his inventory-stocking and inventory-sharing decisions, we explicitly model the interactions between the dealers through inventory sharing and obtain a closed-form cost function for each dealer based on the steady-state distribution of the inventory levels at the two dealers. We then provide a detailed supermodularity analysis of the inventory-sharing and inventory-rationing game in which each dealer has a two-dimensional strategy set (stocking level and rationing level). We show that the full-sharing game (in which dealers precommit to sharing all of their on-hand inventory) and the fixed-sharing-level game (in which dealers precommit to sharing a portion of their on-hand inventory) are supermodular, and thus a pure-strategy Nash equilibrium is guaranteed to exist. For the rationing game (in which dealers precommit to their stocking levels), we show that there exists a dominant strategy equilibrium on the dealers' sharing (rationing) levels. Finally, a comprehensive computational study is conducted to highlight the impact of the manufacturer's incentives, subsidies, and/or transshipment fees on the dealers' sharing behavior.

Suggested Citation

  • Hui Zhao & Vinayak Deshpande & Jennifer K. Ryan, 2005. "Inventory Sharing and Rationing in Decentralized Dealer Networks," Management Science, INFORMS, vol. 51(4), pages 531-547, April.
  • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:4:p:531-547
    DOI: 10.1287/mnsc.1040.0321
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    References listed on IDEAS

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