The Downside of Reorder Flexibility under Price Competition

41 Pages Posted: 27 Dec 2011 Last revised: 9 Jul 2014

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

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: July 8, 2014

Abstract

The supply chain literature shows that reorder flexibility increases profits under competition, assuming fixed prices or quantity competition. We show that price competition, arguably a more appropriate price formation model in the presence of reorder flexibility, may yield opposite results. We consider a three-stage model of duopoly firms that sell differentiated products with stochastic demand. Firms make reorder-flexibility decisions and then place initial orders, before observing demand. After observing demand, firms set prices and, if they have the option, may reorder at a higher cost. We show that the expected profit functions are not unimodal and provide extensive equilibrium results. These appear to be the first for stochastic finite-horizon price-inventory competition with more than one order opportunity. We show: (i) Unilateral reorder flexibility is not an equilibrium; (ii) Reorder flexibility may increase initial orders; (iii) Reorder flexibility hurts profits except if it reduces initial orders and in addition, demand variability is moderate, reordering is sufficiently inexpensive, and products are sufficiently differentiated; and (iv) Firms can avoid the downside of reorder flexibility only in some cases where it hurts profits. In others, firms are trapped in a prisoner's dilemma, whereby reorder flexibility is the dominant strategy even though it hurts their profits.

Keywords: 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 (July 8, 2014). 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)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
296
Abstract Views
2,203
rank
103,142
PlumX Metrics