Inventory Sharing Under Service Quality Competition
Posted: 22 Jan 2020
Date Written: January 2, 2020
In many markets with demand uncertainties, competing firms may share inventories for common products. This paper examines how the competitors’ product sharing affects their inventory and service-quality decisions. We develop a game-theoretical model in which two retailers selling a product from a common manufacturer compete for customers by offering bundled services with the product. The consumers’ purchase process is subject to some stochastic uncertainties that can potentially lead to no purchase. When a retailer runs out of stock of the product, it may replenish its inventory directly from the manufacturer, and/or request the excess inventory from the competitor if they have entered into an inventory-sharing contract before. We find that, when retailers have an inventory-sharing contract, their service level decreases in the transfer price when inventory is exogenously given and is non-monotone in the transfer price when inventory is an endogenous decision. Inventory sharing will soften or intensify service competition depending on the transfer price. Interestingly, when inventory is exogenously given and the transfer price is intermediate, inventory sharing will benefit both the retailers and the consumers. We also find that the retailers’ optimal inventory levels will increase in the transfer price of the inventory-sharing contract and can be higher or lower than levels without the inventory-sharing contract. Moreover, we show that if retailers strategically choose their inventories, inventory sharing may make both retailers worse off at any transfer price.
Keywords: sharing, inventory, services, competitive strategy, marketing-operations interface
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