Responsive pricing and stock redistribution: Implications for stock balancing and system performance

Abstract

We consider two firms that order from a supplier and sell products to the markets with uncertain demand. The firms can transship stocks in between at an endogenous transfer price and set retail prices after learning actual market sizes. The relative timing of stock transshipment and retail pricing, both ex-post market size realization, gives rise to two decision models. The firms set retail prices and transship upon stock imbalance in the pro-pricing model, and, furthermore, transship stocks in between before retail pricing and demand satisfaction in the pro-transshipment model. We demonstrate that responsive pricing alone keeps the firms off stock imbalance and insulates them from the impacts of market uncertainty, and responsive stock redistribution contributes to a more efficient deployment of stocks to market selling, even absent volatility. Enhanced responsiveness in stocking and pricing benefits firms, but can hurt the supplier unless its production cost is sufficiently low.