Optimal inventories and equilibrium price behavior

This paper departs from the established tradition of equilibrium inventory theory by examining the relationship between inventories and market prices when production is instantaneous but distribution is costly. Inventory holdings are not buffer stocks and do not facilitate production smoothing; rather, production variability exceeds the variability of final sales. Voluntary holdings of marketable finished goods are not restricted to occasional “speculation” during periods of unexpectedly low demand, but may persist even when capital losses are anticipated. In these respects, the paper reconciles important features of the inventory decision problem with the results of modern investment theory.