The Downside of Reorder Flexibility under Price Competition

47 Pages Posted: 27 Dec 2011 Last revised: 5 May 2022

See all articles by Philipp Afeche

Philipp Afeche

University of Toronto - Rotman School of Management

Ming Hu

University of Toronto - Rotman School of Management

Yang Li

University of Western Ontario - Richard Ivey School of Business

Date Written: November 26, 2019

Abstract

Reorder flexibility is increasingly relevant in practice. It allows firms to better match supply with unpredictable demand for short life-cycle products. This paper studies how competition affects the flexibility choices, inventory and pricing decisions, and profits of duopoly firms, assuming that \emph{price competition} determines equilibrium prices. The operations literature shows that reorder flexibility increases profits under competition, assuming fixed prices or quantity competition. Motivated by nearshoring trends and technological advances that foster "near-frictionless" resupply conditions, our model of price competition offers an alternative perspective, and more importantly, identifies important caveats to the benefits of reorder flexibility reported so far. Specifically, we consider a three-stage game-theoretic model of symmetric duopoly firms that sell differentiated products with stochastic price-sensitive demand. Firms first make reorder-flexibility decisions; then place initial orders before observing demand; and finally, simultaneously choose prices and, if they have the option, reorder quantities at a higher unit cost. We show: (i) The firms' equilibrium flexibility strategies are symmetric; (ii) reorder flexibility may hurt profits and increase initial orders; (iii) reorder flexibility only improves profits if it reduces initial orders and in addition, demand variability is moderate, reordering is sufficiently inexpensive, and products are sufficiently differentiated; (iv) otherwise, firms may be trapped in a prisoner's dilemma, where reorder flexibility is their dominant strategy although it hurts their profits. These results point to the critical importance of product differentiation and efficient reorder operations as complementary capabilities, in order to reap the benefits and avoid the downside of reorder flexibility under competition.

Keywords: Reorder flexibility, price/inventory competition, quick response, seasonal products, supply chain/marketing interface, volume flexibility

Suggested Citation

Afeche, Philipp and Hu, Ming and Li, Yang, The Downside of Reorder Flexibility under Price Competition (November 26, 2019). Available at SSRN: https://ssrn.com/abstract=1976886 or http://dx.doi.org/10.2139/ssrn.1976886

Philipp Afeche

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-1591 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=philipp.afeche

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Yang Li (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
379
Abstract Views
3,254
rank
116,297
PlumX Metrics