Inventory Management in Markets with Search Frictions

49 Pages Posted: 1 Oct 2019 Last revised: 16 Jun 2021

See all articles by Fei Li

Fei Li

University of North Carolina (UNC) at Chapel Hill

Charles Murry

Boston College - Department of Economics

Can Tian

University of North Carolina (UNC) at Chapel Hill

Yiyi Zhou

Stony Brook University

Date Written: September 19, 2019

Abstract

We present a directed search model of intermediaries with dynamic inventory and revenue management. Buyers purchase goods produced by sellers through intermediaries. Search frictions create demand uncertainty and make instantaneous replenishment impossible. To avoid the risk of stock-out, intermediaries hold inventory and employ inventory-based pricing and ordering policies. In equilibrium, when inventory is high, the intermediary posts a lower retail price to speed up sales and depresses wholesale price to slow down purchases, generating unimodal steady-state distributions of both inventory holdings and retail prices. Using a dataset that contains detailed information on used-car listings, we examine the dynamics of car dealers' inventories, new orders, sales, and retail prices and find evidence supporting the theory. We calibrate the model and show that (i) the proposed mechanism can generate a substantial amount of observed price dispersion, and (ii) our calibration attributes a substantial proportion of intermediaries' value to inventory management.

Keywords: Directed Search, Inventory Management, Revenue Management, Price Dispersion, Used Car, Dealers, Intermediary

JEL Classification: D82, D83, L15, L62

Suggested Citation

Li, Fei and Murry, Charles and Tian, Can and Zhou, Yiyi, Inventory Management in Markets with Search Frictions (September 19, 2019). Available at SSRN: https://ssrn.com/abstract=3456779 or http://dx.doi.org/10.2139/ssrn.3456779

Fei Li (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Charles Murry

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Can Tian

University of North Carolina (UNC) at Chapel Hill ( email )

Gardner Hall
Chapel Hill, NC

Yiyi Zhou

Stony Brook University ( email )

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