The role of inventory in delivery-time competition

The paper operationalizes the notion of shortage cost by considering the behavior of customers and competing firms and examines the role of inventory in response time competition. We start with a single-firm production control model in which customers are characterized by their preferences of price, quality and delivery time. The optimal production/inventory policy and the optimal choice between make-to-order and make-to-stock operations are determined in simple "newsboy"-like formulas. The basic model is then extended to an n-firm market game in which firms compete for orders from the aspect of early delivery. One could think of this setting as an oligopoly racing market. The analysis shows that competition can breed a demand for produce-to-stock, just as other economic phenomena such as economies of scale, uncertainty, or seasonality can induce make-to-stock, and that delivery-time competition increases the buyer's welfare while decreasing the producer's welfare.