
Operations, Information and Decisions Papers
Document Type
Journal Article
Date of this Version
9-2009
Publication Source
Management Science
Volume
55
Issue
9
Start Page
1586
Last Page
1604
DOI
10.1287/mnsc.1090.1050
Abstract
We study the following question: How does competition influence the inventory holdings of General Motors’ dealerships operating in isolated U.S. markets? We wish to disentangle two mechanisms by which local competition influences a dealer’s inventory: (1) the entry or exit of a competitor can change a retailer’s demand (a sales effect); and (2) the entry or exit of a competitor can change the amount of buffer stock a retailer holds, which influences the probability that a consumer finds a desired product in stock (a service-level effect). Theory is clear on the sales effect—an increase in sales leads to an increase in inventory (albeit a less than proportional increase). However, theoretical models of inventory competition are ambiguous on the expected sign of the service-level effect. Via a Web crawler, we obtained data on inventory and sales for more than 200 dealerships over a six-month period. Using cross-sectional variation, we estimated the effect of the number and type of local competitors on inventory holdings. We used several instrumental variables to control for the endogeneity of market entry decisions. Our results suggest that the service-level effect is strong, nonlinear, and positive. Hence, we observe that dealers carry more inventory (controlling for sales) when they face additional competition.
Keywords
inventory competition, empirical, entry, supply chain management, automobile industry
Recommended Citation
Olivares, M., & Cachon, G. P. (2009). Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets. Management Science, 55 (9), 1586-1604. http://dx.doi.org/10.1287/mnsc.1090.1050
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Date Posted: 27 November 2017
This document has been peer reviewed.