Department of Economics

Research seminar with Joao Montez

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Welcome to our research seminar with Joao Montez. Montez is Assistant Professor at London Business School.


Title: Why variable inventory costs intensify retail competition, and a
case for manufacturer returns


Abstract: We study how the extent to which the inventory cost is sunk or remains variable affects retail competition when retailers do not observe each others’ stocks before choosing their prices. We fi…nd intense price competition when inventory costs remain variable, and that markups increase as the sunk fraction increases. We then study whether a manufacturer should endogenously reduce the extent to which retailers’' inventory cost is sunk by offering the possibility of returning unsold stocks for a fraction of the wholesale price. The answer solves a trade-off: returns intensify retail competition by giving retailers the incentive to order excess stocks, but such inefficient over-production must be paid up-front by the manufacturer.
Therefore the optimal return decreases as the manufacturing marginal cost increases. We fi…nally study how the inability to observe retail stocks affects manufacturer pro…tability relative to a situation where stocks are observed (where returns do not change pro…fits).