Vertical Control of Price and Inventory
Krishnan, Harish, and
Ralph A. Winter. 2007. "Vertical Control of Price and Inventory."
American Economic Review,
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)
Article Full-Text Access
Winter, Ralph A.