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

Abstract

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 predominantly on exclusive reselling environments. However, 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 offers 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.

Keywords: Inventory-production : Marketing-pricing, Marketing : Channels of distribution, Marketing : Retailing and wholesaling, Economics: Game Theory and Bargaining Theory