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Inventory in Vertical Relationships with Private Information and Interdependent Values

James J. Anton, Gary Biglaiser and Tracy Lewis

February 2010, Revised

Forthcoming in International Journal of Economic Theory

Abstract: We study the use of inventory when a distributor is better informed about demand than a manufacturer. We find that when distributor and manufacturer values are interdependent it is optimal to endow the distributor with some inventory before it obtains its private information. We characterize the final allocation of the good and show that the distributor may have too few (many) units relative to the efficient allocation when demand is high (low).