A COMPETITIVE INVENTORY MODEL WITH OPTIONS TO REDUCE SETUP AND INVENTORY HOLDING COSTS

In this paper, the profit maximizing economic order quantity (EOQ) mod el is extended to the case of a symmetric oligopoly consisting of seve ral producers who compete with each other for the same potential buyer s. For each producer, we assume that the options of investing in reduc ing the setup and inventory holding costs are available. A primary goa l of this paper is to understand economic implications of the resultin g equilibrium in terms of critical elements of EOQ models such as the setup and inventory holding costs as well as critical elements of the microeconomic market theory such as the market price and the number of competing producers. For an example, we present a unique insight as t o why several Japanese and American producers are striving to reduce t he setup costs under ever increasing competition. Specifically, it wil l be shown that, for a profit maximizing producer, as the number of co mpeting producers increases, his optimal strategy dictates that he red uce his setup and inventory holding costs.