Strategic Inventory in Capacitated Supply Chain Procurement
We study the strategic role of inventory in a sequential two-period procurement setting, where the supplier’s capacity in the first period is limited and the retailer has the option to hold inventory. We compare the equilibrium under a dynamic contract, where the decisions are made at the beginning of each
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period, and a commitment contract, where the decisions for both
periods are made at the beginning of the first period. We show that there is a critical capacity
level below which the outcomes under both types of contracts are identical. When the first
period capacity is above the critical level, the retailer holds inventory in equilibrium and the
inventory is carried due to purely strategic reasons; as capacity increases, so does the strategic
role of inventory. The supplier always prefers lower capacity than the retailer, and the
difference between supplier-optimal and supply-chain optimal capacities, and the corresponding
profits, can be significant. Finally, we find that the retailer’s flexibility to hold inventory is
not always good for the participants or for the channel.
and the retailer determines the quantity to
purchase from the supplier and the retail price to