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Inventory Sharing in the Presence of Commodity Markets
Author(s) -
Park Seung Jae,
Lai Guoming,
Seshadri Sridhar
Publication year - 2016
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12551
Subject(s) - spot contract , commodity , context (archaeology) , spot market , database transaction , value (mathematics) , microeconomics , business , convenience yield , industrial organization , economics , commerce , computer science , finance , futures contract , machine learning , electrical engineering , biology , electricity , paleontology , programming language , engineering
This study investigates the value of inventory sharing in the presence of spot and forward markets. We consider a multi‐period setting where two firms process a common commodity to meet stochastic demands. They can buy and sell the commodity through both the spot and forward markets. They can also share the commodity if one has leftover inventory while the other has excess demand. We first characterize the equilibrium strategies of the two firms. Our analysis reveals that in such a context, the value of inventory sharing is low when the forward price is directly used to value the sharing transactions. We then develop a structured trans‐shipment price scheme that uses a linear combination of the spot and forward prices. We show that this method can substantially increase the value of inventory sharing. Our analysis also reveals that in the presence of liquid spot and forward markets, the value of inventory sharing mainly results from the difference of the transaction costs, and it increases if the market in which firms operate becomes more competitive.