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Competition for Procurement Contracts with Service Guarantees

Fuqua School of Business, Duke University, Durham, North Carolina 27708
European School of Management and Technology, 10178 Berlin, Germany
fernando{at}duke.edu
devericourt{at}esmt.org

We consider a market with two suppliers and a set of buyers in search of procurement contracts with one of the suppliers. In particular, each buyer needs to process a certain volume of work, and each supplier's ability to process the customers' requests is constrained by a production capacity. The procurement contracts include guarantees that the products will be available when needed, and the buyers select a supplier based on their service delivery offers. The suppliers are modeled as make-to-stock queues and compete for the buyers' business. The main objective of this paper is to determine how the procurement contracts are established between buyers and suppliers. Because each buyer selects a single supplier to establish the sourcing relationship, the game fails to have a pure-strategy Nash equilibrium. Instead, an equilibrium is defined as the limit equilibrium of some discrete action games.

Subject classifications: facilities/equipment planning; capacity expansion; games; noncooperative; inventory/production; multi-item; queues; priority.
History: Received March 2004; revision received June 2005; accepted June 2006.