Coordination and Flexibility in Supply Contracts with Options

Barnes-Schuster, Dawn; Bassok, Yehuda; Anupindi, Ravi

doi:10.1287/msom.4.3.171.7754

Cited by 497 publications

(249 citation statements)

References 13 publications

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“…A basic review of these results can be found in Cachon (2003), Kleindorfer and Wu (2003), Swaminathan and Tayur (2003). Linking this literature with the options framework here, several papers (Araman et al 2002, Barnes-Schuster et al 2002, Shi et al 2002 show that buy-back contracts, quantity-flexible contracts, information-sharing contracts, as well the classic newsvendor model and others are all special cases of two-part-tariff options (however, these papers only treat the single-seller, single-buyer case).…”

Section: Literature Reviewmentioning

confidence: 89%

Competitive Options, Supply Contracting, and Electronic Markets

2005

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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.

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Section: Literature Reviewmentioning

confidence: 89%

Competitive Options, Supply Contracting, and Electronic Markets

2005

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“…This insight was apparently first explored in Barnes-Schuster et al (2002), where the authors show that backup agreements, QF contracts, and pay-to-delay contracts are special cases of their options-embedded model (one seller, one buyer, two period).…”

Section: Kleindorfer and Wu Integrating Contracting With B2b Exchangesmentioning

confidence: 98%

Integrating Long- and Short-Term Contracting via Business-to-Business Exchanges for Capital-Intensive Industries

2003

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T his paper surveys the underlying theory and practice in the use of options in support of emerging business-to-business (B2B) markets. Such options, on both capacity and output, play an important role in integrating long-and short-term contracting between multiple buyers and sellers in such markets. This trend is especially important in capital-intensive industries, where improvements in fine tuning the coordination of supply and demand carry large economic benefits. Typically, such options are benchmarked (or defined) on the basis of spot market information conveyed through near real-time B2B transactions. This paper notes a broad set of goods and services currently being traded in both B2B short-run markets and long-term contract markets, and reviews economic and managerial frameworks that have been proposed to explain the structure of contracting in these markets. We provide a general framework based on transactions cost economics, and we use this framework to provide a review and synthesis of existing literature to explain various types of contracting linked to B2B exchanges in capital-intensive industries. The paper concludes with a discussion of implementation challenges and open research questions.

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“…In particular, some papers study option contracts, e.g., Barnes-Schuster et al [1] or Eppen and Iyer [6]. More relevant to our model are papers that analyze the behavior of suppliers in offering options to a buyer, the prelude to introducing competition between suppliers.…”

Section: Literature Reviewmentioning

confidence: 99%

Competition in the Supply Option Market

Martínez‐de‐Albéniz

Simchi‐Levi

2009

Operations Research

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This paper develops a multi-attribute competition model for procurement of commodities, such as electricity. We describe a purchasing process between a buyer and many suppliers for option contracts in a single period supply environment. The parameters of the negotiation are two-dimensional: the option reservation price, or premium, and the option execution price, also referred to as exercise price or strike. These two parameters illustrate the trade-off between total price and flexibility of the contract, and are both important to the buyer. We model the interaction between the suppliers and the buyer as a Stackelberg game in which the suppliers are the leaders and the buyer is the follower. Specifically, suppliers compete to provide supply capacity to the buyer and the buyer optimizes its expected profit by selecting one or more suppliers. We characterize the suppliers' Nash equilibria in pure strategies for a class of customer demand distributions. In particular, we show that this type of interaction gives rise to cluster competition. That is, in equilibrium, suppliers tend to be clustered in small groups of two or three suppliers each, such that within the same group all suppliers use similar technologies and offer the same type of contract.

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Coordination and Flexibility in Supply Contracts with Options

Cited by 497 publications

References 13 publications

Competitive Options, Supply Contracting, and Electronic Markets

Competitive Options, Supply Contracting, and Electronic Markets

Integrating Long- and Short-Term Contracting via Business-to-Business Exchanges for Capital-Intensive Industries

Competition in the Supply Option Market

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