Dynamic Inventory Transshipment Game between Two Retailers of Seasonal Products

Motivated by the common practice that competitive retailers usually transship inventories between each other to increase sales, this article studies the optimal transshipment policies of two retailers selling a same kind of seasonal or fashionable products in a same market. In the problem under investigation, before the selling period begins, both retailers hold a certain quantity of initial inventories that are non-replenishable during the selling process. Once one of the retailers has run out of its inventory, it can rely on the inventory that is transshipped from the other retailer to fulfill its customer. However, as a self-revenue maximizer, the other retailer can reject any transshipment requests. On basis of a discrete-time dynamic programming model, we study the optimal transshipment policies of the two retailers, and characterize the structural properties of their revenue functions. Moreover, we conduct a comparison of the decentralized system with the centralized system where both retailers seek to maximize their joint revenue. Numerical experiments show that though transshipment can increase revenue for both retailers, however, the competition between the retailers can induce a great total revenue loss.