Strategic Inventories in Competitive Supply Chains Under Bargaining

Abstract

Problem definition: Strategic inventory refers to the inventory held by firms purely out of strategic considerations other than operational reasons (e.g., economies of scale). In this paper, we investigate the roles of strategic inventory in a system with two parallel supply chains under both full bargaining and partial bargaining, which differ in whether inventory is included in the bargaining terms. Methodology/results: (i) Under full bargaining, horizontal competition can induce an asymmetric equilibrium, whereby only one of the chains carries strategic inventory and benefits from it when the holding cost is small. The whole system, however, is worse off. (ii) Under partial bargaining, regardless of whether there is horizontal competition, the retailer in a supply chain always carries inventory when his bargaining power is small and the inventory holding cost is low. Furthermore, with horizontal competition, inventory hurts (improves) the system performance when the inventory holding cost is small (above a threshold and not too big). (iii) Full bargaining can be inferior to partial bargaining when there is horizontal competition. Managerial implications: The conventional wisdom about strategic inventory should be taken with caution. Specifically, the traditional role of strategic inventory empowering the retailer in a supply chain is completely dominated by the full bargaining framework, yet it is still present if inventory is not bargained. The inventory driven by horizontal competition plays a different strategic role of signaling to the competitor to avoid an otherwise adverse quantity competition if both retailers carried high inventory. Furthermore, despite the full cooperation nature of the full bargaining framework, it is not always in the retailer’s interest to give up the decision power on inventory (partial bargaining) and include it in the negotiation process (full bargaining). Funding: Q. Tang was supported by Nanyang Technological University [Start-Up Grant 020022-00001]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2020.0223 .