Inventory Mmanagement under Price Protection

Price protection is a common business practice intended to counteract the e®ects of high technological obsolescence. Distributors perceive price protection as a fair and necessary mechanism through which many Original Equipment Manufacturers (OEMs) decrease the e®ects of brutal price erosion on operations of distributors. The following example illustrates how price protection works. Assume that a distributor, with no initial inventory, places an order for 100 units at $800/unit. The order is received instantaneously. After a demand for 70 units is satisfied, the distributor is left with 30 units at the end of the period. At the beginning of the next period, the wholesale price drops to $700/unit. The price protection credit given by OEM to the distributor is the product of the unsold inventory and the price decrease, 30*($800-$700) = $3,000.

By: Karthik Sourirajan; Roman Kapuscinski; Markus Ettl; Pu Huang

Published in: RC24577 in 2008


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