Inventory Management in Decentralized Markets

56 Pages Posted: 1 Oct 2019 Last revised: 6 May 2023

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 faced by each intermediary and make instantaneous replenishment impossible. To profit from the stochastic demand-supply misalignment, intermediaries hold inventory and employ inventory-based pricing and ordering policies. In equilibrium, when inventory is high, an intermediary posts a lower retail price to speed up sales and depresses wholesale price to slow down purchases. We characterize the evolution dynamics of inventory holdings and their steady-state distribution across intermediaries. We consider several extensions, including multi-unit wholesale orders, product differentiation, and heterogeneous intermediaries. Finally, we apply our framework to used-car dealer data from Ohio. We measure important unobservable characteristics of the decentralized markets, quantitatively evaluate the welfare consequence of used-car dealers' inventory management practice, and examine several policy-relevant transition dynamics due to the changes in market characteristics.

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 Decentralized Markets (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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