The Implications of Strategic Inventory for Short-Term vs. Long-Term Supply Contracts in Non-Exclusive Reselling Environments

Abstract

Problem Definition: Although it is well known that a reseller’s ability to hold strategic inventory under a short-term supply contract can potentially benefit both the reseller and a supplier, existing research on strategic inventory focuses almost exclusively on exclusive reselling environments. However, in practice, multiple suppliers often sell to the same non-exclusive reseller, and it is not uncommon for suppliers to ask for future commitments to order quantities from resellers in return for their own commitment to wholesale prices. We investigate how the possibility of strategic inventory influences competing suppliers’ choices between short-term transactional and long-term commitment contracts to a non-exclusive reseller.

Methodology/Results: Using a game-theoretic model, we consider the interactions between two partially substitutable suppliers and a single, non-exclusive reseller over a two-period horizon in which demand is deterministic. We demonstrate that in non-exclusive reselling environments, where more than one supplier sells its product through the same reseller, the use of strategic inventory under short-term contracts intensifies the price competition between suppliers. We show how this effect can be mitigated when one or both suppliers offer a long-term contract. Moreover, we show that long-term contracts can arise as an equilibrium outcome, particularly when products are more substitutable or holding costs are large.

Managerial Implications: By considering the interactions between two partially substitutable suppliers and a non-exclusive reseller in a multi-period setting, we contribute to the literature on strategic contracting and long versus short-term contracts. Our research provides managers with a new explanation, beyond the need to encourage idiosyncratic investments or eliminate the possibility of hold-up, for why long-term contracts may benefit suppliers in practice, who face competition while selling through a non-exclusive reseller.

Keywords: Strategic Inventory, Game Theory, Incentives and Contracting, Supply Chain Management