The Impact of Quick Response in Inventory-Based Competition

Manufacturing & Service Operations Management, Forthcoming

IESE Business School Working Paper No. 722

53 Pages Posted: 24 May 2010

See all articles by Felipe Caro

Felipe Caro

University of California, Los Angeles - Anderson School of Management

Victor Martinez-de-Albeniz

IESE Business School - University of Navarra

Date Written: January 25, 2008

Abstract

We propose an extension of the competitive newsvendor model to investigate the impact of quick response under competition. For this purpose, we consider two retailers that compete in terms of inventory: customers that face a stockout at their first-choice store will look for the product at the other store. Consequently, the total demand that each retailer faces depends on the competitor’s inventory level. We allow for asymmetric reordering capabilities, and we are particularly interested in the case when one of the firms has a lower ordering cost but can only produce at the beginning of the selling season, whereas the second firm has higher costs but can replenish stock in a quick response manner, taking advantage of any incremental knowledge about demand (if it is available). We visualize this problem as the competition between a traditional make-to-stock retailer that builds up inventory before the season starts versus a retailer with a responsive supply chain that can react to early demand information. We provide conditions for this game to have a unique pure-strategy subgame-perfect equilibrium, which then allows us to perform numerical comparative statics. We confirm that quick response is more beneficial when demand uncertainty is higher or exhibits a higher correlation over time. We also find that the competitive advantage from quick response is larger when facing a slow response competitor, and interestingly, asymmetric competition can be desirable to both competitors.

Suggested Citation

Caro, Felipe and Martinez-de-Albeniz, Victor, The Impact of Quick Response in Inventory-Based Competition (January 25, 2008). Manufacturing & Service Operations Management, Forthcoming, IESE Business School Working Paper No. 722, Available at SSRN: https://ssrn.com/abstract=1615066

Felipe Caro (Contact Author)

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Victor Martinez-de-Albeniz

IESE Business School - University of Navarra ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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