The Price Theory and Empirics of Inventory Management

39 Pages Posted: 1 Oct 2019

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 develop a directed search model where buyers purchase goods produced by sellers through intermediaries. The presence of search frictions creates demand uncertainty and makes instantaneous replenishment impossible. To avoid the risk of stockout, an intermediary holds inventory. The intermediary's trade-off between inventory cost and stockout risk depends on the size of inventory and determines its optimal retail pricing and restocking policy. In equilibrium, when the intermediary's inventory increases, he posts a lower retail price to speed up sales and depresses wholesale price to slow down purchases. In the steady state, the equilibrium generates unimodal distributions of both inventory holdings and retail prices. Using a dataset that contains detailed information on used car listings, we empirically examine dealers' inventory, new orders, sales, and retail prices. Our empirical findings are consistent with the model predictions.

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, The Price Theory and Empirics of Inventory Management (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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