INVENTORY MANAGEMENT IN DECENTRALIZED MARKETS

Abstract

We present a directed search model of intermediaries' dynamic inventory and revenue management. Search frictions hinder instantaneous replenishment, prompting intermediaries to utilize dynamic inventory‐based pricing and ordering strategies. In equilibrium, when inventory is high, an intermediary posts a lower retail price to speed up sales and depresses wholesale price to slow down purchases. We characterize the evolution dynamics of inventory holdings and their steady‐state distribution, and extend the model to multi‐unit wholesale orders, product differentiation, and heterogeneous intermediaries. Using data from used car dealers, we quantitatively evaluate the welfare consequence of used‐car dealers' inventory management practice.

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