Group Buying of Competing Retailers with Strategic Inventory

Abstract

Group buying involves cooperation and competition among multiple retailers, and strategic inventory can affect this relationship. To investigate the interaction between them, we consider a two-tier distribution channel consisting of one supplier and two competing retailers who can hold strategic inventory, and explore the effect of strategic inventory on the operational decisions and profits of all members of the supply chain. In this research, we make a major contribution by integrating strategic inventory into group buying. Furthermore, we make another major contribution by examining the impact of strategic inventory on the operational decisions of the supplier and the retailers in a competing environment. We construct a Stackelberg game, where the supplier is the leader and the retailers are followers. We find that the retailers will hold strategic inventory under group buying only when the holding cost is low or the basic wholesale price is high. Moreover, a higher holding cost is detrimental to the retailers while beneficial to the supplier, and intensified competition is detrimental to both the retailers and the supplier. Interestingly, contrary to the common view that inventory should be reduced or not held, the retailers have incentives to hold strategic inventory. The supplier also prefers that because strategic inventory benefits her. Therefore, strategic inventory achieves a win–win outcome for the supplier and the retailers. In addition, strategic inventory can improve supply chain performance and consumer surplus.