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

Forthcoming in Manufacturing and Service Operations Management

48 Pages Posted: 11 Jan 2021 Last revised: 22 Apr 2022

See all articles by Abhishek Roy

Abhishek Roy

Temple University, Fox School of Business, Department of Statistics, Operations, and Data Science

Stephen Gilbert

University of Texas at Austin - McCombs School of Business

Guoming Lai

University of Texas at Austin - Red McCombs School of Business

Date Written: July 30, 2021

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

Suggested Citation

Roy, Abhishek and Gilbert, Stephen and Lai, Guoming, The Implications of Strategic Inventory for Short-Term vs. Long-Term Supply Contracts in Non-Exclusive Reselling Environments (July 30, 2021). Forthcoming in Manufacturing and Service Operations Management, Available at SSRN: https://ssrn.com/abstract=3752131 or http://dx.doi.org/10.2139/ssrn.3752131

Abhishek Roy (Contact Author)

Temple University, Fox School of Business, Department of Statistics, Operations, and Data Science ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://www.fox.temple.edu/mcm_people/roy-abhishek/

Stephen Gilbert

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Guoming Lai

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
196
Abstract Views
745
rank
225,458
PlumX Metrics