Motivated by the potential growth of capacity markets due to 3‐D manufacturing, we examine the integration of long‐ and short‐term contracts for a capacity marketplace. In the marketplace, manufacturers and suppliers first participate in long‐term contracts in which manufacturers reserve capacity at one or more suppliers. Subsequently, manufacturers and suppliers trade in a spot market to fulfill residual demand and sell residual capacity, respectively; in the spot market, the equilibrium price is determined dynamically and endogenously by the balance of supply and demand for capacity. We build a model to derive insights on the decisions taken by the manufacturers and suppliers and on the equilibrium characteristics of the market. We show existence of equilibria in both long‐ and short‐term contract markets and establish a relationship between the equilibrium prices for the two types of contracts. We also find that when short‐term–only contracts are available, the expected backlog is lower compared to when integrated contracts are used for much of the planning horizon. Further, we find that the presence of long‐term contracts increases the volatility of spot prices. Our results will make practicing managers aware that contractual arrangement can influence spot price volatility.
AkellaR.AramanV. F.KleinknechtJ. (2002). B2b markets: Procurement and supplier risk management in e‐business. In GeunesJ.PardalosP. M.RomeijnH. E. (Eds.), Supply chain management: Models, applications, and research directions, Applied optimization (pp. 33–66). Kluwer Academic Publishers.
2.
AndersonE.ChenB.ShaoL. (2017). Supplier competition with option contracts for discrete blocks of capacity. Operations Research, 65(4), 952–967.
3.
BessembinderH.LemmonM. L. (2002). Equilibrium pricing and optimal hedging in electricity forward markets. The Journal of Finance, 57(3), 1347–1382.
4.
BoyabatlıO.KleindorferP. R.KoontzS. R. (2011). Integrating long‐term and short‐term contracting in beef supply chains. Management Science, 57(10), 1771–1787.
5.
d'AveniR. (2015). The 3‐d printing revolution. Harvard Business Review, 93(5), 40–48.
6.
DevalkarS.AnupindiR.SinhaA. (2011). Integrated optimization of procurement, processing and trade of commodities. Operations Research, 59(6), 1369–1381.
7.
DongL.LiuH. (2007). Equilibrium forward contracts on nonstorable commodities in the presence of market power. Operations Research, 55, 128–145.
8.
GoelA.GutierrezG. J. (2011). Multi‐echelon procurement and distribution policies for traded commodities. Management Science, 57(12), 2228–2244.
9.
GoelA.GutierrezG. J. (2012). Integrating commodity markets in the optimal procurement policies of a stochastic inventory system. Working Paper, Case Western Reserve University.
10.
GoelV. (2017). Chip makers plot a future in U.S. New York Times, February 26, B1.
11.
HobbsB. F.PangJ.‐S. (2007). Nash‐Cournot equilibria in electric power markets with piecewise linear demand functions and joint constraints. Operations Research, 55(1), 113–127.
12.
JaikumarR.UptonD. M. (1993). The coordination of global manufacturing. In BradleyS. P.HausmanJ. A.NolanR. L. (Eds.) Globalization, technology and competition: The fusion of computers and telecommunications. Harvard Business School Press.
13.
KietzmannJ.PittL.BerthonP. (2015). Disruptions, decisions, and destinations: Enter the age of 3‐d printing and additive manufacturing. Business Horizons, 58, 209–215.
14.
KleindorferP. R.WuD. J. (2003). Integrating long‐ and short‐term contracting via business‐to‐business exchanges for capital intensive industries. Management Science, 49(11), 1597–1615.
15.
LaplumeA. O.PetersenB.PearceJ. M. (2016). Global value chains from a 3d printing perspective. Journal of International Business Studies, 47(5), 595–609.
16.
LeeH.WhangS. (2002). The impact of the secondary market on the supply chain. Management Science, 48(6), 719–731.
17.
LekstutisM.ShahS. (2020). Rudolph, with his nose so bright, is moving from China. Supply Chain Management Review, 24(3), 8–11.
18.
McKinsey, & Business of Fashion (2021). The state of fashion 2021. https://www.mckinsey.com/media/mckinsey/industries/retail/our%20insights/state%20of%20fashion/2021/the‐state‐of‐fashion‐2021‐vf.pdf
MilnerJ. M.KouvelisP. (2007). Inventory, speculation and sourcing strategies in the presence of online exchanges. Manufacturing & Service Operations Management, 9(3), 312–331.
21.
MuthJ. F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315–335.
OttatiG. D. (2014). A transnational fast fashion industrial district: An analysis of the Chinese businesses in Prato. Cambridge Journal of Economics, 38(5), 1247–1274.
24.
ParkerG. G.TanB.KazanO. (2019). Electric power industry: Operational and public policy challenges and opportunities. Production and Operations Management, 28(11), 2738–2777.
25.
PeiP. P.‐E.Simchi‐LeviD.TuncaT. I. (2011). Sourcing flexibility, spot trading, and procurement contract structure. Operations Research, 59(3), 578–601.
26.
PisanoG. P.AdamsP. (2009). VF brands: Global supply chain strategy. Harvard Business School.
27.
PopescuD. G.SeshadriS. (2013). Demand uncertainty and excess supply in commodity contracting. Management Science, 59(9), 2135–2152.
28.
RoutledgeB. R.SeppiD. J.SpattC. S. (2000). Equilibrium forward curves for commodities. Journal of Finance, 55, 1297–1338.
29.
RuddellK.PhilpottA. B.DownwardA. (2017). Supply function equilibrium with taxed benefits. Operations Research, 65(1), 1–18.
30.
SapraA.JacksonP. L. (2013). On the equilibrium behavior of a supply chain market for capacity. Manufacturing & Service Operations Management, 15(1), 132–147.
31.
ScheinkmanJ. A.SchechtmanJ. (1983). A simple competitive model with production and storage. Review of Economic Studies, 50(3), 427–441.
32.
SoundararajanV.KhanZ.TarbaS. Y. (2018). Beyond brokering: Sourcing agents, boundary work and working conditions in global supply chains. Human Relations, 71(4), 481–509.
33.
TuncaT. I.ZeniosS. A. (2006). Supply auctions and relational contracts for procurement. Manufacturing & Service Operations Management, 8(1), 43–67.
34.
WuD. J.KleindorferP. R. (2005). Competitive options, supply contracting and electronic markets. Management Science, 51(3), 452–466.
35.
YaoJ.AdlerI.OrenS. S. (2008). Modeling and computing two‐settlement oligopolistic equilibrium in a congested electricity network. Operations Research, 56(1), 34–47.
36.
ZhaoH.BisiA. (2010). Optimal operating policies in a commodity trading market with the manufacturer's presence. Naval Research Logistics, 57(2), 127–148.
