KCG Working Paper No. 7: Incentives through Inventory Control in Supply Chains

Authors: Zhan Qu, Horst Raff and Nicolas Schmitt

The paper shows that taking inventory control out of the hands of competitive or exclusive retailers and assigning it to a manufacturer increases the value of a supply chain especially
for goods whose demand is highly volatile. This is because doing so solves incentive distortions that arise when retailers have to allocate inventory across sales periods, and thus allows for better intertemporal price discrimination. Assigning inventory control to a manufacturer is also shown to have effects on total inventory and social welfare.