We consider a two-echelon production inventory system with a manufacturer having limited production capacity and a distribution center (DC). There is a positive transportation time between the manufacturer and the DC. Customers gain a value by receiving the product and incur a waiting cost when facing a delay. We assume that customers' waiting cost depends on their degree of impatience with respect to delay, which is captured by a convex waiting cost function. Customers are strategic with respect to joining the system and either place an order or balk from the system upon their arrival depending on their expected waiting time. We study the Stackelberg equilibrium assuming that the DC acts as a Stackelberg leader and customers are the followers. We first obtain the total expected revenue and then provide a heuristic to derive the optimal base-stock levels in the warehouse and the DC as well as the optimal price of the product.

This address is directed toward applied economists as they provide information to private and public decision makers. Central to this discussion is the role of markets as institutions in achieving society's desired ends. Current “economic correctness”–the view that unfettered markets are superior in achieving efficiency, growth, and welfare-has attempted to return a larger role to the private sector, but the relative roles of market-oriented versus government-oriented solutions to problems are often not well appraised. Views presented herein calls for agricultural economists to move simultaneously toward an understanding of the strategic behavior of firms in imperfectly competitive markets and toward an adoption of policy analysis consistent with a socially complex and globally integrated economy.