DEMAND UNCERTAINTY, INVENTORIES, AND RESALE PRICE MAINTENANCE

We show that a manufacturer facing uncertain demand and selling throug h a competitive retail market may wish to support adequate retail inve ntories by preventing the emergence of discount retailers. In our mode l, discounters offer low prices made possible by low probability of be ing saddled with unsold inventories in the event of slack demand. Full -price retailers are compensated for a higher probability of unsold in ventories by a higher retail price when they sell. We show that preven ting discounting increases the manufacturer's wholesale demand and pro fits, and we delineate demand conditions under which equilibrium inven tory holding and consumer welfare increase.