Inventories, market structure, and price volatility

The effect of inventories on the level and volatility of price is analyzed under alternative market structures. In a fairly general setting, it is shown that inventories have no effect on the average level of prices in a Cournot duopoly in the absence of depreciation. The effect of storage on price volatility is analyzed in a more restrictive, linear-quadratic setting in which it is found that imperfectly competitive producers make less use of inventories for smoothing random fluctuations than is efficient. The effect of market structure on price volatility depends on whether demand shocks or cost shocks are more important.