Strategic Inventories under Limited Commitment

Abstract

In a dynamic storable good market where demand changes over time, we investigate the producer's strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producer's profitability, particularly when the producer cannot commit to future prices. We show that the producer's inventories act as a strategic device to mitigate the loss from the lack of commitment. Our results provide a rationale for the producer's inventory behavior that sheds new light on the well-documented empirical evidence about inventories.

Storable Good Market With Intertemporal Cost Variations

“…In the current paper, we explore an alternative legitimate reason for time-varying prices, namely, intertemporal variations in the firm's production costs. As discussed in Section 9, our significantly different results provide a complementary picture to Dudine et al (2006) and Antoniou and Fiocco (2019), which can contribute to the analysis of dynamic strategic interactions in storable good markets. In a modelà la Dudine et al (2006) with time-dependent buyer valuations, Berbeglia et al (2019) characterize the optimal preannounced pricing policy and the optimal contingent pricing policy for a monopolistic retailer that sells indivisible items either to a finite number of buyers with unit demand or to a single buyer with arbitrary demand per period.…”

“…As a result, the firm's lack of commitment reduces consumer surplus and the firm's profits, which is definitely welfare detrimental. In this setting, Antoniou and Fiocco (2019) show that a firm with limited commitment powers has strategic incentives to hold inventories when facing the possibility of buyer stockpiling. Inventory accumulation mitigates the firm's loss from the lack of commitment.…”

“…shown by Antoniou and Fiocco (2019) in the context of a growing market, a firm with limited commitment powers can exhibit strategic incentives to hold inventories in order to credibly affect its future price. In our setting, consumer storage can still emerge in equilibrium, particularly when convex production costs or capacity constraints prevent the firm from covering the entire future demand.…”

Strategic Inventories in a Supply Chain with Downstream Cournot Duopoly

“…In Antoniou and Fiocco (2017), not only the retailer is allowed to carry inventory, but also the supplier. The supplier holds inventory in response to the retailer's stockpiling in the first period.…”

The Choice of When to Buy and When To Sell

“…People have been known to wait in line for hours to buy a new model of iPhone, before others do. 1 They have also camped out for days and nights in the hope of buying a house 2 Perhaps firms create such artificial shortages, or set prices that generate excess demand, to publicize the good, or to create a buzz about it. We do not examine such motives, but our model does examine how the costs consumers incur in seeking the good affect demand for the good and the price the firm can charge.…”