Inventory sharing and rationing in decentralized dealer networks

Hui Zhao, Vinayak Deshpande, Jennifer K. Ryan

Research output: Contribution to journalArticle

67 Citations (Scopus)

Abstract

An increasing number of manufacturers have started to pursue a strategy that promotes inventory sharing among the dealers in their distribution network. In this paper we analyze a decentralized dealer network in which each independent dealer is given the flexibility to share his inventory. We model inventory sharing as a multiple demand classes problem in which each dealer faces his own customer demand with high priority, and inventory-sharing requests from other dealers with low priority. Assuming that each dealer uses a base-stock and threshold-rationing policy for his inventory-stocking and inventory-sharing decisions, we explicitly model the interactions between the dealers through inventory sharing and obtain a closed-form cost function for each dealer based on the steady-state distribution of the inventory levels at the two dealers. We then provide a detailed supermodularity analysis of the inventory-sharing and inventory-rationing game in which each dealer has a two-dimensional strategy set (stocking level and rationing level). We show that the full-sharing game (in which dealers precommit to sharing all of their on-hand inventory) and the fixed-sharing-level game (in which dealers precommit to sharing a portion of their on-hand inventory) are supermodular, and thus a pure-strategy Nash equilibrium is guaranteed to exist. For the rationing game (in which dealers precommit to their stocking levels), we show that there exists a dominant strategy equilibrium on the dealers' sharing (rationing) levels. Finally, a comprehensive computational study is conducted to highlight the impact of the manufacturer's incentives, subsidies, and/or transshipment fees on the dealers' sharing behavior.

Original languageEnglish (US)
Pages (from-to)531-547
Number of pages17
JournalManagement Science
Volume51
Issue number4
DOIs
StatePublished - Apr 1 2005

Fingerprint

Dealers
Rationing
Supermodularity
Distribution network
Base stock
Incentives
Cost function
Inventory rationing
Inventory model
Dominant strategy
Subsidies
Fees
Pure strategy Nash equilibrium
Transshipment
Interaction

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

Cite this

Zhao, Hui ; Deshpande, Vinayak ; Ryan, Jennifer K. / Inventory sharing and rationing in decentralized dealer networks. In: Management Science. 2005 ; Vol. 51, No. 4. pp. 531-547.
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Inventory sharing and rationing in decentralized dealer networks. / Zhao, Hui; Deshpande, Vinayak; Ryan, Jennifer K.

In: Management Science, Vol. 51, No. 4, 01.04.2005, p. 531-547.

Research output: Contribution to journalArticle

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