Managing strategic inventory under retailer competition

Abstract

Besides carrying the operational inventory, retailers may invest in the strategic inventory for obtaining the discount of future wholesale price, although this behavior can induce the holding cost. In this paper, we adopt a game theoretical method to check the role of strategic inventory under the retailer-to-retailer competition. The impact of strategic inventory on a two-tier supply chain model is investigated under the retailer competition. A supplier sells products to customers through two competing retailers who may choose to carry the strategic inventory in a two-period setting. The results indicate that the retailer-to-retailer competition may affect the decisions of supply chain parties about the strategic inventory and pricing as follows. First, the competition weakens the incentives of retailers in holding the strategic inventory. Second, the lower inventory holding expense would still stimulate retailers to hold the strategic inventory for more profits. Third, facing two competing and asymmetric retailers, the prisoner's dilemma and chicken game equilibrium may occur between the two retailers when the inventory holding cost is intermediate under the uniform wholesale price strategy. However, under the differentiated wholesale price strategy, the prisoner's dilemma and chicken game equilibrium can be eliminated. For similar operational styles including store styles and locations, retailers can break through the dilemma by simultaneously holding the strategic inventory, and can obtain more profits from carrying strategic inventory under differentiated wholesale price strategy. Therefore, the differentiated wholesale price strategy can promote the two retailers to cooperate with each other and can benefit all parties.