Capacity Games with Supply Function Competition

Abstract

We introduce a general model for suppliers competing for a buyer's procurement business. The buyer faces uncertain demand and there is a requirement to reserve capacity in advance of knowing the demand. Each supplier has costs that are two dimensional, with some capacity costs incurred prior to production and some production costs incurred at the time of delivery. These costs are general functions of quantity and this naturally leads us to a supply function competition framework in which each supplier offers a schedule of prices and quantities. We show that there is an equilibrium of a particular form: the buyer makes a reservation choice that maximizes the overall supply chain profit, each ..