Price and Inventory Dynamics in an Oligopoly Industry: A Framework for Commodity Markets

Alexander Steinmetz

No 92, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S, s) order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Consequently, with strategic competition in prices, (S, s) inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.

Keywords: Inventory dynamics; price competition; oligopoly; (S; s) order policy; commodity markets. (search for similar items in EconPapers)
JEL-codes: D21 D43 E22 L81 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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