A competitive inventory model with options to reduce setup and inventory holding costs

Abstract

In this paper, the profit maximizing economic order quantity (EOQ) model is extended to the case of a symmetric oligopoly consisting of several producers who compete with each other for the same potential buyers. For each producer, we assume that the options of investing in reducing the setup and inventory holding costs are available. A primary goal of this paper is to understand economic implications of the resulting equilibrium in terms of critical elements of EOQ models such as the setup and inventory holding costs as well as critical elements of the microeconomic market theory such as the market price and the number of competing producers. For an example, we present a unique insight as to why several Japanese and American producers are striving to reduce the setup costs under ever increasing competition. Specifically, it will be shown that, for a profit maximizing producer, as the number of competing producers increases, his optimal strategy dictates that he reduce his setup and inventory holding costs.