Inventories and Sticky Prices: Note

In a previous article, Alan Blinder analyzed the relationship between optimal inventory decisions and the process of price adjustment. Arguing that inventory permits separation of production and sale decisions and allows the firm greater flexibility in responding to anticipated demand disturbances, Blinder demonstrates that the responsiveness of relative prices depends on the cost of storage and the temporal structure of the demand shocks. Blinder's paper relies upon a simple model of a monopolist capable of backlogging orders and storing unsold goods. This feature of the model vitiates Blinder's extension of his result to situations in which order backlogs are prohibited. However, this does not negate the value of Blinder's central theorem.