Inventories, Stock-Outs and Production Smoothing

Andrew B. Abel

The Review of Economic Studies, 1985, vol. 52, issue 2, 283-293

Abstract: If stock-outs are ignored and if demand shocks are additive, then optimal behaviour requires that the marginal cost of production (MC) be equated with the expected marginal revenue of increasing expected sales by one unit (EMR). However, with more general demand shocks (and still ignoring stock-outs), the excess of MC over EMR has the same sign as the covariance of the slope of the demand curve and the marginal valuation of inventory. The equality of EMR and MC is also broken by taking account of stock-outs, even if demand shocks are additive. If there is a production lag, then taking account of stock-outs implies that optimal behaviour will be characterized by production smoothing even if the cost of production is linear. Two alternative definitions of production smoothing are presented and optimal behaviour in the presence of stock-outs displays each type of smoothing.

Date: 1985
References: Add references at CitEc
Citations: View citations in EconPapers (39)

Downloads: (external link)
http://hdl.handle.net/10.2307/2297622 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:52:y:1985:i:2:p:283-293.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().