Anton S. Ovchinnikov
Visiting Professor of Decision Sciences
Firms often must procure inventory/capacity before knowing what the demand will be, so there is a potential for a mismatch between inventory and demand, the “inventory risk."The authors show that, because of inventory risk, an increase in the number of competitors can lead to an increasing trend in market prices. Furthermore, the authors show that, ceteris paribus, because of how inventory risk impacts competitive behavior, firms may prefer to incur inventory risk rather than to avoid it.To illustrate the robustness of the authors' results, they establish these findings using three complementary methodologies: (i) using data from a classroom experiment, (ii) using a quantal response equilibrium simulation to capture realistic irrationalities in managerial decisions under competition, and (iii) using a fully rational Nash equilibrium model to capture the impact of the competition per se.That all three methods lead to identical qualitative findings reinforces the main message of the authors' paper: Inventory risk reverses the standard intuition for how an increase in the number of competitors impacts prices.