Strategic Inventories under Supply Chain Competition
We consider the effects of strategic inventory in the presence of chain-to-chain competition in a two-period model. Established findings suggest that strategic inventory may alleviate double marginalization and improve the efficiency of a decentralized distribution channel. However, none consider the role of strategic inventory under chain-to-chain competition. We build a two-period model consisting of two competing supply chains, each with a down- stream retailer and an exclusive manufacturer. We characterize the firms’ strategies under the concept of Perfect Bayesian Equilibrium. We show that as the competition between two supply chains becomes fiercer, retailers will carry more inventory, which intensifies the supply chain competition. Consequently, this competition intensification effect can overshadow the effect of double marginalization alleviation. We document the possibility that under supply chain competition, manufacturers can strictly prefer the elimination of inventories to strategic inventories. Nevertheless, the prisoner’s dilemma can arise if the competition intensity is intermediate. Despite its appeal among firms of a single supply chain, the role of strategic inventory is altered or even reversed by chain-to-chain competition. Conventional wisdom on strategic inventory should be applied with caution.
Yanzhi Li (David) is Professor of Management Sciences and Marketing at College of Business, City University of Hong Kong. He received his bachelor’s degree in Computer Science from Tsinghua University and PhD in Industrial Engineering and Engineering Management from Hong Kong University of Science and Technology. His research interests include (1) interface research between Operations and Marketing, such as assortment planning, channel management, and advertising; and 2) Analytics for marketing, logistics and supply chain. His papers have appeared in journals such as Marketing Science, M&SOM, POM, EJOR, IEEE Trans, NRL and IIE. Yanzhi has provided consulting services to firms in Hong Kong and mainland China, and is currently working on data-driven projects spanning marketing, logistics, retailing, and health care operations.