AN OPTIMAL MIDDLEMAN FIRM PRICE ADJUSTMENT POLICY: THE “SHORT-RUN INVENTORY-BASED PRICING POLICY”

Abstract

This paper examines the optimum pricing policies of middleman firms who carry an inventory of goods bought for resale. Each period the firm in the theoretical model is required to post a price before it observes its realized demand. In disequilibrium situations, the firm's profit-maximizing pricing policy is shown to be a “short-run inventory-based pricing policy” which requires the firm to post a price below the long-run equilibrium price upon observing its actual beginning inventory level above its optimum level, and to post a price above the long-run equilibrium price upon observing its actual inventory level below its optimum level. The final section suggests that the use of such policies by middleman firms will lead to market price adjustments which are both consistent with the “law of supply and demand” and which are based on explicit maximizing behavor.

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