The Implications of Strategic Inventory for Short-Term vs. Long-Term Supply Contracts in Non-Exclusive Reselling Environments

Problem Definition: Although it is well known that a reseller’s ability to hold strategic inventory under a short-term supply contract can potentially benefit both the reseller and a supplier, existing research on strate- gic inventory focuses almost exclusively on exclusive reselling environments. However, in practice, multiple suppliers often sell to the same non-exclusive reseller, and many supply contracts involve long-term commit- ments to the price and quantity from both the supplier and the reseller. We investigate how the possibility of strategic inventory influences competing suppliers’ choices between short-term transactional and long-term commitment contracts to a non-exclusive reseller.Methodology/Results: Using a game-theoretic model, we consider the interactions between two partially sub- stitutable suppliers and a single, non-exclusive reseller over a two-period horizon in which demand is deter- ministic. We demonstrate that in non-exclusive reselling environments, where more than one supplier sells its product through the same reseller, the use of strategic inventory under short-term contracts intensifies the price competition between suppliers. We show how this effect can be mitigated when one or both suppliers offer a long-term contract. Moreover, we show that long-term contracts can arise as an equilibrium outcome, particularly when products are more substitutable or holding costs are large.Managerial Implications: By considering the interactions between two partially substitutable suppliers and a non-exclusive reseller in a multi-period setting, we contribute to the literature on strategic contracting and long versus short-term contracts. Our research provides managers with a new explanation, beyond the need to encourage idiosyncratic investments or eliminate the possibility of hold-up, for why long-term contracts may benefit manufacturers in practice, who face competition while selling through a non-exclusive reseller