Strategic Inventory and Supply Chain Behavior

Based on a serial supply chain model with two periods and price-sensitive demand, we present the first experimental test of the effect of strategic inventories on supply chain performance. In theory, if holding costs are sufficiently low, the buyer builds up a strategic inventory (even if no operational reasons for stock-holding exist) to limit the supplier's market power, and to increase the own profit share. As it turns out, this enhances the overall supply chain performance. The supplier anticipates the effect of the strategic inventory and differentiates prices to capture a part of the increased supply chain profits. Our results show that the positive effects of strategic inventories are even more pronounced than theoretically predicted, because strategic inventories empower buyers by shifting the perception of the fair split. Overall, strategic inventories have a double positive effect, a strategic and a behavioral, both reducing the average wholesale prices and dampening the double marginalization effect. The latter effect leads to more equitable payoffs.