Supplier competition with option contracts for discrete blocks of capacity
File(s)
Published version
Author(s)
Anderson, Edward
Chen, Bo
Shao, Lusheng
Type
Journal Article
Abstract
When a firm faces an uncertain demand, it is common to procure supply using some type of option in addition to spot purchases. A typical version of this problem involves capacity being purchased in advance, with a separate payment made that applies only to the part of the capacity that is needed. We consider a discrete version of this problem in which competing suppliers choose a reservation price and an execution price for blocks of capacity, and the buyer, facing known distributions of demand and spot price, needs to decide which blocks to reserve. We show how to solve the buyer’s (combinatorial) problem efficiently and also show that suppliers can do no better than offer blocks at execution prices that match their costs, making profits only from the reservation part of their bids. Finally we show that in an equilibrium the buyer selects the welfare maximizing set of blocks.
Date Issued
2017-07-01
Date Acceptance
2016-12-15
Citation
Operations Research, 2017, 65 (4), pp.952-967
ISSN
0030-364X
Publisher
INFORMS
Start Page
952
End Page
967
Journal / Book Title
Operations Research
Volume
65
Issue
4
Copyright Statement
© 2017 The Author(s). This work is licensed under a Creative Commons Attribution 4.0 International
License.You are free to copy, distribute, transmit and adapt thiswork, but youmust attribute thiswork
as “Operations Research. Copyright ©2017 The Author(s). https://doi.org/10.1287/opre.2017.1593,
used under a Creative Commons Attribution License: https://creativecommons.org/licenses/
by/4.0/.”
License.You are free to copy, distribute, transmit and adapt thiswork, but youmust attribute thiswork
as “Operations Research. Copyright ©2017 The Author(s). https://doi.org/10.1287/opre.2017.1593,
used under a Creative Commons Attribution License: https://creativecommons.org/licenses/
by/4.0/.”
License URL
Identifier
http://gateway.webofknowledge.com/gateway/Gateway.cgi?GWVersion=2&SrcApp=PARTNER_APP&SrcAuth=LinksAMR&KeyUT=WOS:000417850700002&DestLinkType=FullRecord&DestApp=ALL_WOS&UsrCustomerID=1ba7043ffcc86c417c072aa74d649202
Subjects
Social Sciences
Science & Technology
Technology
Management
Operations Research & Management Science
Business & Economics
supply option
competitive bidding
discrete blocks
submodularity
Nash equilibrium
MANAGEMENT
STRATEGIES
AUCTIONS
MARKETS
CHAIN
PRICE
Publication Status
Published
Date Publish Online
2017-06-20