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Inventory competition with yield reliability improvement

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  • Chung‐Yee Lee
  • Tao Lu

Abstract

This article studies the inventory competition under yield uncertainty. Two firms with random yield compete for substitutable demand: If one firm suffers a stockout, which can be caused by yield failure, its unsatisfied customers may switch to its competitor. We first study the case in which two competing firms decide order quantities based on the exogenous reliability levels. The results from the traditional inventory competition are generalized to the case with yield uncertainty and we find that quantity and reliability can be complementary instruments in the competition. Furthermore, we allow the firms to endogenously improve their yield reliability before competing in quantity. We show that the reliability game is submodular under some assumptions. The results indicate that the competition in quantity can discourage the reliability improvement. With an extensive numerical study, we also demonstrate the robustness of our analytical results in more general settings. © 2015 Wiley Periodicals, Inc. Naval Research Logistics 62: 107–126, 2015

Suggested Citation

  • Chung‐Yee Lee & Tao Lu, 2015. "Inventory competition with yield reliability improvement," Naval Research Logistics (NRL), John Wiley & Sons, vol. 62(2), pages 107-126, March.
    • Handle: RePEc:wly:navres:v:62:y:2015:i:2:p:107-126
    DOI: 10.1002/nav.21616
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    7. Wei Liu & Shiji Song & Ying Qiao & Han Zhao & Huachang Wang, 2020. "The Loss-Averse Newsvendor Problem with Random Yield and Reference Dependence," Mathematics, MDPI, vol. 8(8), pages 1-15, July.

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