INVENTORY MANAGEMENT IN DECENTRALIZED MARKETS

Fei Li, Charles Murry, Can Tian and Yiyi Zhou

International Economic Review, 2024, vol. 65, issue 1, 431-470

Abstract: We present a directed search model of intermediaries' dynamic inventory and revenue management. Search frictions hinder instantaneous replenishment, prompting intermediaries to utilize dynamic inventory‐based pricing and ordering strategies. In equilibrium, when inventory is high, an intermediary posts a lower retail price to speed up sales and depresses wholesale price to slow down purchases. We characterize the evolution dynamics of inventory holdings and their steady‐state distribution, and extend the model to multiunit wholesale orders, product differentiation, and heterogeneous intermediaries. Using data from used‐car dealers, we quantitatively evaluate the welfare consequence of used‐car dealers' inventory management practice.

Date: 2024
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