Supplier competition with option contracts for discrete blocks of capacity

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 execution prices that match their costs, making profits only from the reservation part of their bids. Finally we show that in an equilibrium the buyer selects the welfare maximizing set of blocks

Equilibrium Predictions in Wholesale Electricity Markets

We review supply function equilibrium models and their predictions on market outcomes in the wholesale electricity auctions. We discuss how observable market characteristics such as capacity constraints, number of power suppliers, load distribution and auction format affect the behavior of suppliers and performance of the market. We specifically focus on the possible market power exerted by pivotal suppliers and the comparison between discriminatory and uniform-price auctions. We also describe capacity investment behavior of electricity producers in the restructured industry.Electricity markets; Supply function equilibrium; Markov perfect equilibrium; electricity auctions; pivotal suppliers; capacity investment.

Competitive Bidding in Supply Chains

This thesis is primarily concerned with the competition between suppliers for a buyer’s procurement business with consideration of subcontracting, commitment and capacity reservation. Under the circumstance where suppliers face diseconomies of scale, it may be cost effective for a buyer to split an order across different suppliers. Even when the buyer chooses only one supplier, the winning supplier may subcontract part of the work to the others subsequently. Motivated by these observations, Chapter 2 studies a supplier bidding game where a buyer requests quotes from two competing suppliers. We consider two procurement scenarios: (1) Order Splitting where each supplier submits a function bid which specifies different payments for different quantities, and the buyer may split the order; (2) Single-Sourcing Commitment where the buyer commits to purchasing from only one supplier before suppliers submit their bids, and the winning supplier may subsequently subcontract with the losing one. The second and third papers investigate the competitive behaviour of suppliers with capacity reservation. To hedge against financial risks, the suppliers often require a buyer to reserve capacity in advance by paying an upfront fee. In Chapter 3, we consider a discrete version of this problem where competing suppliers each choose a reservation price and an execution price for blocks of capacity, and the buyer needs to decide which blocks to reserve. Chapter 4 studies a continuous version of the problem where we allow general cost functions. The suppliers compete by offering the price functions (for reservation and execution) and the buyer decides how much to reserve from each supplier. This thesis sheds light on how suppliers compete with each other by considering a variety of factors. We believe an in-depth look at the competitive behaviour of suppliers will deepen our understanding of a buyer’s procurement process, and hence helps a buyer make a better sourcing decision

Competitive Bidding in Supply Chains

This thesis is primarily concerned with the competition between suppliers for a buyer’s procurement business with consideration of subcontracting, commitment and capacity reservation. Under the circumstance where suppliers face diseconomies of scale, it may be cost effective for a buyer to split an order across different suppliers. Even when the buyer chooses only one supplier, the winning supplier may subcontract part of the work to the others subsequently. Motivated by these observations, Chapter 2 studies a supplier bidding game where a buyer requests quotes from two competing suppliers. We consider two procurement scenarios: (1) Order Splitting where each supplier submits a function bid which specifies different payments for different quantities, and the buyer may split the order; (2) Single-Sourcing Commitment where the buyer commits to purchasing from only one supplier before suppliers submit their bids, and the winning supplier may subsequently subcontract with the losing one. The second and third papers investigate the competitive behaviour of suppliers with capacity reservation. To hedge against financial risks, the suppliers often require a buyer to reserve capacity in advance by paying an upfront fee. In Chapter 3, we consider a discrete version of this problem where competing suppliers each choose a reservation price and an execution price for blocks of capacity, and the buyer needs to decide which blocks to reserve. Chapter 4 studies a continuous version of the problem where we allow general cost functions. The suppliers compete by offering the price functions (for reservation and execution) and the buyer decides how much to reserve from each supplier. This thesis sheds light on how suppliers compete with each other by considering a variety of factors. We believe an in-depth look at the competitive behaviour of suppliers will deepen our understanding of a buyer’s procurement process, and hence helps a buyer make a better sourcing decision

Empirical analysis of countervailing power in business-to-business bargaining

This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis are delineated, and a pragmatic empirical methodology is presented. It is readily implementable on the basis of transaction data, routinely collected by antitrust authorities. The empirical framework is illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and for heterogeneity across buyers and sellers

Empirical analysis of countervailing power in business-to-business bargaining

This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis for a pragmatic reduced form empirical pricing model are delineated. This model is readily implementable on the basis of transaction data, routinely collected by antitrust authorities and illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and established supply chains and for heterogeneity across buyers and sellers due to intrinsically unobservable outside options

Empirical analysis of buyer power

This paper provides a comprehensive econometric framework for the empirical analysis of buyer power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of buyer power. Testable predictions from the theoretical analysis are delineated, and a pragmatic empirical methodology is presented. It is readily implementable on the basis of transaction data, routinely collected by antitrust authorities. The empirical framework is illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and for heterogeneity across buyers and sellers.

Empirical analysis of countervailing power in business-to-business bargaining

This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis for a pragmatic reduced form empirical pricing model are delineated. This model is readily implementable on the basis of transaction data, routinely collected by antitrust authorities and illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and established supply chains and for heterogeneity across buyers and sellers due to intrinsically unobservable outside options.

Review of the Proposed Reserve Markets in New England

ISO New England proposes reserve markets designed to improve the existing forward reserve market and improve pricing during real-time reserve shortages. We support all of the main elements of the proposal. For example, we agree that little is gained by allowing reserve availability bids in the day-ahead market. Doing so greatly increases the complexity of the market without the prospect of more efficient pricing. Rather, offline reserves are most efficiently priced and awarded well in advance, as is done by the improved forward reserve market.Auctions; Multiple Object Auctions; Electricity Auctions