Essays in Industrial Organization and Inventory Management

This thesis investigates managerial decision-making within the framework of the inventory management of a multi-establishment firm. Through a combination of descriptive analysis, reduced-form evidence, and structural modelling, the research aims to understand how decisions made by managers at the business unit level can have an impact on the overall performance of a decentralized organization. Specifically, this thesis examines the intricate vertical relationship between local managers and the firm's headquarters in order (1) to understand the impact of manager ability in different organizational structures, and (2) to quantify the impact of a misalignment between the objectives of the firm and the objectives of its managers due to within-firm competition. The findings of the research offer valuable insights into the trade-offs associated with decentralization in large organizations, and provide evidence of the overall impact on the firm's profits from aligning the strategic incentives of managers with its own goals. The first chapter provides a detailed description of the empirical setting studied in this thesis: the Liquor Control Board of Ontario. An overview of the organization's history and its institutional details reveals how the company has become one the largest retailers of beverage alcohol in the world, and how it now operates as a large multi-divisonal organization with a decentralized inventory management structure. A descriptive analysis of the organization's product portfolio decisions -- the process of introducing new products and delisting existing products -- describes the crucial top layer of the inventory management process in the organization, and shows how the company interacts with producers in order to provide consumers with a continuously evolving selection of products. The second chapter, based on joint work with Victor Aguirregabiria, investigates the impact of decentralizing inventory decision-making in multi-establishment firms. The findings show significant heterogeneity among the inventory decisions made by the store managers in the retail chain. Specifically, a dynamic structural model reveals substantial differences in managers’ perceived costs, and a correlation between the variance of these perceptions and the education and professional experience of managers. Counterfactual experiments then show that centralizing inventory management reduces costs by eliminating the impact of managers’ skill heterogeneity. However, these benefits are largely offset by the negative effect of delayed demand information. The third chapter examines how the objectives of managers can be misaligned with the overall objectives of the firm. In particular, the chapter investigates how competitive interactions between store managers in a decentralized retail chain can lead to sub-optimal outcomes from the point of view of the organization. The structural estimation of a game of product assortment decisions shows that store managers do not fully internalize the impact of their inventory decision-making on the overall organization. Findings also reveal that the extent to which store managers behave in their own self-interest is correlated with the size of their store and the number of stores they compete with. Counterfactual experiments then show that this misalignment of objectives implies a substantial loss in profit for the firm, but a negligible effect on consumer welfare. However, enhancing the role of district managers, who are responsible for overseeing store operations within a defined geographic area, can mitigate within-firm competition and provide consumers with greater product variety.

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