Strategic inventories under limited commitment

In a dynamic storable good market where demand changes over time, we investigate the producer’s strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producer’s profitability, particularly when the producer cannot commit to future prices. We show that the producer holds inventories as a strategic device to mitigate the loss from the lack of commitment. In an environment that allows for buyer stockpiling, our results provide a rationale for the producer’s inventory behavior that sheds new light on the well-documented empirical evidence about inventories.