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Article: Optimal bidding and contracting strategies for capital-intensive goods

TitleOptimal bidding and contracting strategies for capital-intensive goods
Authors
KeywordsBidding
Capital-Intensive Goods
Contracting
Investment
Modeling
Issue Date2002
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejor
Citation
European Journal Of Operational Research, 2002, v. 137 n. 3, p. 657-676 How to Cite?
AbstractThis paper models contracting arrangements between one Seller and one or more Buyers when the "deliverable" or output under the contract is produced in a non-scalable capital-intensive production facility. The basic model proposed allows the Seller and Buyers to negotiate bilateral contracts for the good in advance. On the day, the Seller and Buyers can also sell excess capacity or buy additional non-contract output in an associated backup market, which is being referred to as the spot market for the good. The type of bilateral contract studied has a two-part contract fee structure, and it is at the foundation of practical contracts used by many capital-intensive industries, where capacity can only be expanded well in advance of output requirements. The first part is a reservation cost per unit of capacity, and the second, an execution cost per unit of output when this capacity is actually used. This paper derives the Seller's optimal bidding and Buyers' optimal contracting strategies in a von Stackelberg game with the Seller as the leader. We show that Buyers' optimal reservation level follows an index that combines the Seller's reservation and execution cost. The Seller's optimal strategy is to reveal its variable cost of producing output while extracting its margin from the Buyers using the capacity reservation charge. This structure allows for the Seller to assure in advance its ability to pay the capital costs of capacity while providing Buyers appropriate incentives to take advantage of better terms on the day if alternative, cheaper sources should arise after contracts have been set. © 2002 Elsevier Science B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/177695
ISSN
2015 Impact Factor: 2.679
2015 SCImago Journal Rankings: 2.595
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWu, DJen_US
dc.contributor.authorKleindorfer, PRen_US
dc.contributor.authorZhang, JEen_US
dc.date.accessioned2012-12-19T09:39:34Z-
dc.date.available2012-12-19T09:39:34Z-
dc.date.issued2002en_US
dc.identifier.citationEuropean Journal Of Operational Research, 2002, v. 137 n. 3, p. 657-676en_US
dc.identifier.issn0377-2217en_US
dc.identifier.urihttp://hdl.handle.net/10722/177695-
dc.description.abstractThis paper models contracting arrangements between one Seller and one or more Buyers when the "deliverable" or output under the contract is produced in a non-scalable capital-intensive production facility. The basic model proposed allows the Seller and Buyers to negotiate bilateral contracts for the good in advance. On the day, the Seller and Buyers can also sell excess capacity or buy additional non-contract output in an associated backup market, which is being referred to as the spot market for the good. The type of bilateral contract studied has a two-part contract fee structure, and it is at the foundation of practical contracts used by many capital-intensive industries, where capacity can only be expanded well in advance of output requirements. The first part is a reservation cost per unit of capacity, and the second, an execution cost per unit of output when this capacity is actually used. This paper derives the Seller's optimal bidding and Buyers' optimal contracting strategies in a von Stackelberg game with the Seller as the leader. We show that Buyers' optimal reservation level follows an index that combines the Seller's reservation and execution cost. The Seller's optimal strategy is to reveal its variable cost of producing output while extracting its margin from the Buyers using the capacity reservation charge. This structure allows for the Seller to assure in advance its ability to pay the capital costs of capacity while providing Buyers appropriate incentives to take advantage of better terms on the day if alternative, cheaper sources should arise after contracts have been set. © 2002 Elsevier Science B.V. All rights reserved.en_US
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejoren_US
dc.relation.ispartofEuropean Journal of Operational Researchen_US
dc.subjectBiddingen_US
dc.subjectCapital-Intensive Goodsen_US
dc.subjectContractingen_US
dc.subjectInvestmenten_US
dc.subjectModelingen_US
dc.titleOptimal bidding and contracting strategies for capital-intensive goodsen_US
dc.typeArticleen_US
dc.identifier.emailZhang, JE: jinzhang@hku.hken_US
dc.identifier.authorityZhang, JE=rp01125en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1016/S0377-2217(01)00093-5en_US
dc.identifier.scopuseid_2-s2.0-0037117184en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-0037117184&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume137en_US
dc.identifier.issue3en_US
dc.identifier.spage657en_US
dc.identifier.epage676en_US
dc.identifier.isiWOS:000173466200014-
dc.publisher.placeNetherlandsen_US
dc.identifier.scopusauthoridWu, DJ=7404297774en_US
dc.identifier.scopusauthoridKleindorfer, PR=7004198347en_US
dc.identifier.scopusauthoridZhang, JE=7601346659en_US

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