Contract design and supply chain coordination in the electricity industry.

In this article we propose a model of the supply chain in electricity markets with multiple generators and retailers and considering several market structures. We analyze how market design interacts with the different types of contract and market structure to affect the coordination between the different firms and the performance of the supply chain as a whole. We compare the implications on supply chain coordination and on the players’ profitability of two different market structures: a pool based market vs. bilateral contracts, taking into consideration the relationship between futures and spot markets. Furthermore, we analyze the use of contracts for differences and two-part-tariffs as tools for supply chain coordination. We have concluded that there are multiple equilibria in the supply chain contracts and structure and that the two-part tariff is the best contract to reduce double marginalization and increase efficiency in the management of the supply chain

A capacitated commodity trading model with market power

In this paper we consider the problem of a trader who purchases a commodity in one market and resells it in another. The trader is capacitated: the trading volume is limited by operational constraints, e.g., logistics. The two markets quote different prices, but the spread is reduced when trading takes place. We are interested in finding the optimal trading policy across the markets so as to obtain the maximum profit in the long-term, taking into account that the trading activity influences the price processes, i.e., market power. As in the no-market-power case, we find that the optimal policy is determined by three regions, where 1) move as much as possible from one market to the other; 2) the same in the opposite direction; or 3) do nothing. Finally, we use the model to analyze kerosene price differences between New York and Los Angeles.commodity trading; price processes; inventory management;

Securitization and Real Investment in Incomplete Markets

We study the impact of financial innovations on real investment decisions within the framework of an incomplete market economy comprised of fi rms, investors, and an intermediary. The fi rms face unique investment opportunities that arise in their business operations and can be undertaken at given reservation prices. The cash flows thus generated are not spanned by the securities traded in the fi nancial market, and cannot be valued uniquely. The intermediary purchases claims against these cash flows, pools them together, and sells tranches of primary or secondary securities to the investors. We derive necessary and suffcient conditions under which projects are undertaken due to the intermediary's actions, and firms are amenable to the pool proposed by the intermediary, compared to the no-investment option or the option of forming alternative pools. We also determine the structure of the new securities created by the intermediary and identify how it exploits the arbitrage opportunities available in the market. Our results have implications for valuation of real investments, synergies among them, and their fi nancing mechanisms. We illustrate these implications using an example of inventory decisions under random demand

Securitization and Real Investment in Incomplete Markets

We study the impact of financial innovations on real investment decisions within the framework of an incomplete market economy comprised of fi rms, investors, and an intermediary. The fi rms face unique investment opportunities that arise in their business operations and can be undertaken at given reservation prices. The cash flows thus generated are not spanned by the securities traded in the fi nancial market, and cannot be valued uniquely. The intermediary purchases claims against these cash flows, pools them together, and sells tranches of primary or secondary securities to the investors. We derive necessary and suffcient conditions under which projects are undertaken due to the intermediary's actions, and firms are amenable to the pool proposed by the intermediary, compared to the no-investment option or the option of forming alternative pools. We also determine the structure of the new securities created by the intermediary and identify how it exploits the arbitrage opportunities available in the market. Our results have implications for valuation of real investments, synergies among them, and their fi nancing mechanisms. We illustrate these implications using an example of inventory decisions under random demand

Sourcing Flexibility, Spot Trading, and Procurement Contract Structure

We analyze the structure and pricing of option contracts for an industrial good in the presence of spot trading. We combine the analysis of spot trading and buyers' disparate private valuations for different suppliers' products, and we jointly endogenize the determination of three major dimensions in contract design: (i) sales contracts versus options contracts, (ii) flat-price versus volume-dependent contracts, and (iii) volume discounts versus volume premia. We build a model in which a supplier of an industrial good transacts with a manufacturer who uses the supplier's product to produce an end good with an uncertain demand. We show that, consistent with industry observations, volume-dependent optimal sales contracts always demonstrate volume discounts (i.e., involve concave pricing). However, options are more complex agreements, and optimal option contracts can involve both volume discounts and volume premia. Three major contract structures commonly emerge in optimality. First, if the seller has a high discount rate relative to the buyer and the seller's production costs or the production capacity is low, the optimal contracts tend to be flat-price sales contracts. Second, when the seller has a relatively high discount rate compared to the buyer but production costs or production capacity are high, the optimal contracts are sales contracts with volume discounts. Third, if the buyer's discount rate is high relative to the seller's, then the optimal contracts tend to be volume-dependent options contracts and can involve both volume discounts and volume premia. However, when the seller's production capacity is sufficiently low, it is possible to observe flat-price option contracts. Furthermore, we provide links between production and spot market characteristics, contract design, and efficiency.National Science Foundation (U.S.) (contract CMMI-0758069)National Science Foundation (U.S.) (contract DMI-0245352