Base stock policy with outside competition in a two-stage supply chain

This paper focuses on the effects of outside competition on an optimal echelon base stock level in a two stage supply chain. This is new in that we have been studying the effects of inside competition within a supply chain up to now. It is known that the optimal echelon base stock level with inside competition within a supply chain is less than the global optimal echelon base stock level without inside competition. This is due to the ‘public goods’ nature of inventory. That is, more inventory is better, but one wants the other to invest more, thus resulting in under-investment. However, this phenomenon becomes weaker as outside competition increases. We show that as outside competition becomes stronger, the ‘public goods’ effects decrease and the optimal echelon base stock level increases. In the level of competition is sufficiently high, the optimal echelon base stock level goes even higher than the global optimal echelon base stock level. We develop a theoretical model for the analysis and conduct a numerical analysis.