Information and Inventory in Distribution Channels
Authors
Published
Management Science,
October (4th Quarter/Autumn)
2007
Abstract
We examine the trade-offs between demand information and inventory in a
distribution channel. While better demand information has a positive direct
effect for the manufacturer of improving the efficiency of holding inventory in
a channel, it can also have the strategic effect of increasing retail prices and
limiting the extraction of retail profits. Having inventory in the channel can
help the manufacturer to manage retail pricing behavior while better extracting
retail surplus. Thus even if the information system is perfectly reliable,
the manufacturer might not always want to institute an information enabled
channel over a channel with inventory. In a bilateral channel and imperfectly
reliable information system, we show that if the manufacturer were to choose
the precision of the demand information system, the manufacturer might not
prefer perfect information, even if such information was costless to acquire.
In a channel with a single retailer, we show that the channel with information
is preferred over the channel with inventory if the marginal cost of production
is sufficiently high. In a channel with competing retailers the information
enabled channel is preferred when retail competition is sufficiently intense. The
presence of inventory can play a role in managing competition among retailers
and in helping the manufacturer’s to appropriate surplus especially when
retailers are sufficiently differentiated.
