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  3. American Economic Review
  4. December 2007
  5. Vertical Control of Price and Inventory

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Vertical Control of Price and Inventory

  • Harish Krishnan
  • Ralph A. Winter
American Economic Review
vol. 97, no. 5, December 2007
(pp. 1840–1857)
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Abstract

This paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain. We consider an upstream manufacturer selling to two outlets, which compete as differentiated duopolists and face uncertain demand. Demand spillovers between the outlets arise in the event of stockouts. The price mechanism, in which each outlet pays a two-part price and chooses price and inventory, virtually never coordinates incentives efficiently. Contracts that can elicit first-best decisions include resale price floors or buy-back policies (retailer-held options to sell inventory back to the manufacturers). (JEL D21, L13, L14, M11)

Citation

Krishnan, Harish, and Ralph A. Winter. 2007. "Vertical Control of Price and Inventory." American Economic Review, 97 (5): 1840–1857. DOI: 10.1257/aer.97.5.1840

JEL Classification

  • D21 Firm Behavior: Theory
  • L13 Oligopoly and Other Imperfect Markets
  • L14 Transactional Relationships; Contracts and Reputation; Networks
  • M11 Production Management