Capacity Games with Supply Function Competition

Abstract

Procurement Auctions with Capacity Reservation It frequently happens that a supplier needs to invest in building capacity prior to supplying a product. Then the buyer will need to reserve capacity from suppliers and pay for this in advance of knowing the final demand. “Capacity Games with Supply Function Competition” by Edward Anderson, Bo Chen, and Lusheng Shao studies a very general version of this problem, in which both capacity and production costs are volume dependent. They explore how an auction will operate in this setting and allow supply function bids from suppliers. They apply this framework to a newsvendor problem with unreliable suppliers, a portfolio procurement setting with supply options and a spot market, and a bundling problem with nonsubstitutable products. This helps to understand when we may expect the buyer to make a reservation choice that maximizes the overall supply chain profit. The key to these results is to show that the supply chain optimal profit is submodular in the set of suppliers.