A Portfolio Approach for Supply Contracts
We develop a general framework for supply contracts in which portfolios of
contracts can be analyzed and optimized. In this setting, suppliers compete
on price and flexibility and the buyer select one or more supplier so as
to maximize expected profit. We characterize the buyer optimal replenishment
policy for a portfolio of options and provide structural properties of the
optimal portfolio. This allows us to identify options that are dominated
by either the spot market or other options. We also characterize the suppliers'
Nash equilibria in pure strategies and show that
in equilibrium, suppliers compete only against other suppliers with similar
technologies.