Competitive Options, Supply Contracting, and Electronic Markets

Abstract

T his paper develops a framework for analyzing business-to-business (B2B) transactions and supply chain management based on integrating contract procurement markets with spot markets using capacity options and forwards. The framework is motivated by the emergence of B2B exchanges in several industrial sectors to facilitate such integrated contract and spot procurement. In the framework developed, a buyer and multiple sellers may either contract for delivery in advance (the "contracting" option) or they may buy and sell some or all of their input/output in a spot market. Contract pricing involves both a reservation fee per unit of capacity and an execution fee per unit of output if capacity is called. The key question addressed is the structure of the optimal portfolios of contracting and spot market transactions for the buyer and these sellers, and the pricing thereof in market equilibrium. Existence and structure of market equilibria are characterized for the associated competitive game between sellers with heterogeneous technologies, under the assumption that they know the buyer's demand function. This allows an explicit characterization of the price of capacity options and the value of managerial flexibility, as well as providing conditions under which B2B exchanges are efficient and sustainable.

Supplier Competition with Option Contracts for Discrete Blocks of Capacity

“…Detailed literature reviews can be found in Wu and Kleindorfer (2005) and Martínez-de-Albéniz and Simchi-Levi (2005). Recently, several papers have incorporated spot market and capacity limits into supply option models.…”

“…The combination of spot purchases and supply options has seen widespread applications in capitalintensive industries, such as commodity chemicals, electric power, and semiconductors (Kleindorfer andWu 2003, Wu andKleindorfer 2005). The challenge of such hybrid commodity procurement is exacerbated if there are further restrictions that require buying firms to reserve capacity in blocks.…”

Research on Retailer's Optimal Order Strategy in B2B Electronic Trading Market Environment

“…Xing, Wang and Feng [6] from the supply chain and logistics point of view of B2B electronic trading market research. At the beginning of the study, scholars began to study the B2B electronic trading market mainly from how to reduce the transaction cost and how to influence the transaction mode.…”

“…B2B electronic trading market in the trading model there are two, one option trading, and the second is the spot transactions [5][6][7][8]. Their study show that the spot market is mobile, they are the market liquidity is defined as: traders intend to buy and sell, according to the then market price can only be a certain probability to find the right transaction Object, this article also uses this definition.…”

Combining Spot and Futures Markets: A Hybrid Market Approach to Dynamic Spectrum Access

“…Yi & Scheller-Wolf (2003) studied the nature of the optimal inventory policy when such a dual sourcing is used, in the presence of a fixed cost for the spot market participation. Wu & Kleindorfer (2005) proposed a general framework with integrated long-term and short-term contract decisions for non-storable commodities. Kouvelis et al (2013) studied the problem of dual sourcing with financial hedging for storable commodities.…”