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Supplier competition with option contracts for discrete blocks of capacity
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Anderson, Edward, Chen, Bo and Shao, Lusheng (2017) Supplier competition with option contracts for discrete blocks of capacity. Operations Research, 65 (4). pp. 952-967. doi:10.1287/opre.2017.1593
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Official URL: https://doi.org/10.1287/opre.2017.1593
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.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HF Commerce Q Science > QA Mathematics |
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Operational Research & Management Sciences Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Pricing -- Mathematical models, Combinatorial analysis | ||||||||
| Journal or Publication Title: | Operations Research | ||||||||
| Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||
| ISSN: | 0030-364X | ||||||||
| Official Date: | 1 July 2017 | ||||||||
| Dates: |
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| Date of first compliant deposit: | 19 December 2016 | ||||||||
| Volume: | 65 | ||||||||
| Number: | 4 | ||||||||
| Number of Pages: | 6 | ||||||||
| Page Range: | pp. 952-967 | ||||||||
| DOI: | 10.1287/opre.2017.1593 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Open Access | ||||||||
| RIOXX Funder/Project Grant: |
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