The burden of the cost of inventory is expressed in terms of money. Holding of inventories has considerable costs. When stocks fall quickly, they exert a pressure for price increase, similarly when stocks grow quickly, the cost of holding inventories would grow to force the firm for a price decrease. An oligopolist relies more on the short run adjustments in its level of stocks than on price changes. The stocks of finished goods provide the adjustment mechanism necessary when demand does not equal supply. No firm would indulge in price-cutting and there is a tendency for price stability. The price will be kept unchanged due to fear of retaliation and prices tend to be sticky and inflexible. Another feature of oligopolist market with product differentiation is price rigidity. Oligopoly refers to that form of imperfect competition where there will be only a few sellers. Greater the difference between price and marginal cost, the greater will be the level of inventory stock. Pricing is not the problem, but product differentiation is the problem, and competition is not on prices but on products. The optimum level of inventory will depend upon the variability of sales and the relationship between revenue and cost. In case of imperfect competition, the demand is uncertain and the firm needs to keep inventories to take advantage of profitable sales opportunities. The firm gains and retains his customers by competitive advertising and sales promotion. There will be no unique price, instead there will be a cluster of prices. Each firm produces basically the same product but endeavours to distinguish it from its rivals by product differentiation. Imperfect competition is a term denoting a market situation which is not perfect. The changes in the demand for the commodity are not under the control of the firm.
It is essential to note that demand varies in an unpredictable manner. The motive to hold inventories to meet demand is quite important for a firm. In business, it is always advisable to hold some precautionary stock to overcome the special problems, like power shortages, transport bottlenecks, labour unrest, etc. The ordinary motive for holding inventories is to enable a constant rate of output flow of the business firm for the uninterrupted supply for which every firm should hold stock of raw materials and semi-finished goods. To Facilitate a Constant Rate of Output Flow : The motive to hold inventories for speculative purposes would depend upon the expectations of the price increase as against the holding cost of inventory which includes the prevalent market rate of interest or capital cost, the cost of storage and handling, and the cost of deterioration and obsolescence.Ģ. In a situation of inflation, it may happen that the value of stock increases overtime at a rate which is higher than the cost of holding stocks. If we can stock the required inventory well in advance, we are able to save the cost of idle time of machinery and the cost of idle time of men. The need for inventory must be balanced against the preference for liquidity. The existence of large quantities of inventories is naturally a cause for alarm. One of the causes for the failure of a business is a huge inventory. Therefore, the higher the level of inventory, the lower the level of cash. The businessman needs more cash to conduct his daily business activities. Now business activity has increased and the problem of inventory has also become more complex. Need for Inventory :Ī businessman needs inventory to carry on the day-to-day operations of his business.
These inventories are known as anticipation inventories. The raw materials may be stored in the form of semi-finished goods or stored in their original form. When a business firm anticipates a price rise or introduces the business promotion tools, it will need to accumulate inventories.