Inventory Theory and the Gods of Olympus

Abstract

In inventory theory, the typical model assumes the existence of marginal cost data for ordering, holding, and shortages of stock. This paper questions the validity of inventory theory, since it appears to be impossible to measure any of these costs. We conclude that marginal costs would be irrelevant in a more empirical theory, which should concentrate on macrolevel policy analysis rather than microlevel cost minimization.

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