Journal article

Supplier Competition with Option Contracts for Discrete Blocks of Capacity

E Anderson, B Chen, L SHAO

Operations Research | INFORMS (Institute for Operations Research and Management Sciences) | Published : 2017

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 executi..

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University of Melbourne Researchers

Grants

Awarded by Engineering and Physical Sciences Research Council UK under a Science and Innovation Award


Funding Acknowledgements

Bo Chen was supported in part by the Engineering and Physical Sciences Research Council UK under a Science and Innovation Award (Grant EP/D063191/1).