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Inventory Dynamics and Supply Chain Coordination

Harish Krishnan and Ralph A. Winter
Management Science
Vol. 56, No. 1 (January 2010), pp. 141-147
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/27784097
Page Count: 7
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Inventory Dynamics and Supply Chain Coordination
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Abstract

This paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting. A manufacturer distributes a product through retailers who compete on both price and fill rates. We show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions. When the product is highly perishable, retailers are biased toward excessive price competition and inadequate inventories. Vertical price floors or inventory buybacks (subsidies for unsold inventory) can coordinate incentives in both pricing and inventory decisions. When the product is less perishable, the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives.

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