Strategic Inventories in a Supply Chain with Downstream Cournot Duopoly

TL;DR

This paper models a supply chain with strategic inventories in a duopoly setting, revealing how inventory strategies influence profits and societal welfare under different contractual and competitive scenarios.

Contribution

It introduces a game-theoretic model analyzing strategic inventories in a supply chain with downstream Cournot competition, highlighting their impact on profits and social welfare.

Findings

Strategic inventories under dynamic contracts benefit all supply chain parties.

Downstream Cournot competition reduces retailer profits but benefits others.

High inventory holding costs or wholesale contracts can eliminate retailer inventories.

Abstract

The inventories carried in a supply chain as a strategic tool to influence the competing firms are considered to be strategic inventories (SI). We present a two-period game-theoretic supply chain model, in which a singular manufacturer supplies products to a pair of identical Cournot duopolistic retailers. We show that the SI carried by the retailers under dynamic contract is Pareto-dominating for the manufacturer, retailers, consumers, the channel, and the society as well. We also find that the retailer's SI, however, can be eliminated when the manufacturer commits wholesale contract or inventory holding cost is too high. In comparing the cases with and without downstream competition, we also show that the downstream Cournot duopoly undermines the retailers in profits, but benefits all others.