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American Economic Review: Vol. 97 No. 5 (December 2007)

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Vertical Control of Price and Inventory

Article 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

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)

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Authors

Krishnan, Harish
Winter, Ralph A.


American Economic Review


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