Biform Analysis of Inventory Competition

Abstract

This paper provides a model of the competitive newsvendor problem in which there is price competition following the inventory decisions. Using the biform game formalism of Brandenburger and Stuart (2004), the price competition is modeled by considering the core of the induced cooperative game. Such an analysis allows price competition to be modeled without a priori assumptions about price-setting power or pricing procedures. The paper shows that with no uncertainty, the inventory decision is equivalent to the capacity decision in Cournot competition. With uncertainty, the analysis again reduces to Cournot competition if the demand uncertainty is characterized by an appropriately constructed, expected demand curve. The results highlight the critical role of the fixed-price assumption in newsvendor models.

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