Strategic inventories in two-period oligopoly
Paper number: 00/17
Paper date: November 2000
Paper Category: Working Paper
H. Peter Mollgaard, Sougata Poddar and Dan Sasaki
A general model of two-period duopoly is set up to show how inventories can serve a strategic purpose, enabling the firm to commit to raise its latter-period output. The strategic effect of inventories depends on the convexity of the cost function, on the cost of storage, and on the slopes of each firm's individual supply schedules. Our analysis encompasses general up-sloping supply schedules, with horizontal Bertrand supply schedules and vertical Cournot supply schedules as the two polar cases, via one continuous parameter which has a straightforward one-to-one correspondence with what has been broadly known as the conjectural variation parameter. A closed form of the strategic inventories is then established for a parametrised two-period n-firm linear oligopoly, which can be treated as a user-friendly package for empirical estimation as well as for regulatory policy making.