Inventory management in markets with substituting customers is extremely challenging,
not only for a downstream wholesaler, but also for upstream manufacturers.
Motivated by the structures in the agrochemical market, we analyze the optimal production
and stocking quantities of a manufacturer and a wholesaler, respectively, in
a two-stage supply chain with upstream competition and vertical information asymmetries.
We characterize a monopolistic wholesaler's optimal stocking quantities and
show that these quantities are not necessarily monotonic, neither in the available
production quantities nor in the customers' substitution rates. We further derive
the optimal production quantities of a monopolistic and a competitive manufacturer
when they are incompletely informed about the wholesaler's stocking quantities. We
find that the introduction of competition may lead to decreasing production quantities
for some products. Furthermore, a product's end-of-season inventories at the
manufacturer which arise due to information asymmetries may decrease even when
initial production levels increase.
Key words: customer substitution; supply chain; asymmetric information; competition;
inventory managemen
