Information and Inventory in Distribution Channels

39 Pages Posted: 4 May 2006

See all articles by Ganesh Iyer

Ganesh Iyer

University of California, Berkeley - Marketing Group

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School

Rakesh Niraj

Case Western Reserve University

Date Written: March 2006

Abstract

We examine the trade-offs between demand information and inventory in a distribution channel. While better demand information has a positive direct effect for the manufacturer in improving the efficiency of holding inventory in a channel, it can also have the strategic effect of increasing retail prices and limiting the extraction of retail profits. Having inventory in the channel can help the manufacturer to manage retail pricing behavior while better extracting retail surplus. Thus even if the information system is perfectly reliable, the manufacturer might not always want to institute an information enabled channel over a channel with inventory.

We show this first in a channel with a single retailer, where the channel with perfect information is preferred over the channel with inventory only if the marginal cost of production is sufficiently high. We also analyze a channel with an imperfectly reliable information system and find that if the manufacturer were to choose the precision of the demand information system, it might not prefer perfect information, even if such information was costless to acquire. In a channel with competing retailers, the channel with perfect information is preferred when retail competition is sufficiently intense. Thus, the presence of inventory can play a role in managing competition among retailers and in helping the manufacturers to appropriate surplus especially when retailers are sufficiently differentiated.

Keywords: information, inventory, supply chain, channels

JEL Classification: C70, C72, D80, M31

Suggested Citation

Iyer, Ganesh and Narasimhan, Chakravarthi and Niraj, Rakesh Kumar, Information and Inventory in Distribution Channels (March 2006). Available at SSRN: https://ssrn.com/abstract=899551 or http://dx.doi.org/10.2139/ssrn.899551

Ganesh Iyer (Contact Author)

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive, Campus Box 1133
Olin School of Business
St. Louis, MO 63130-4899
United States
314-935-6313 (Phone)
314-935-6359 (Fax)

Rakesh Kumar Niraj

Case Western Reserve University ( email )

10900 Euclid Avenue
PBL 235
Cleveland, OH OHIO 44106-7235
United States

HOME PAGE: http://weatherhead.case.edu/faculty/Rakesh-Niraj/

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