Capacity reservation contracts for high-tech industry

Capacity reservation contracts for high-tech industry

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Article ID: iaor20084213
Country: Netherlands
Volume: 176
Issue: 3
Start Page Number: 1659
End Page Number: 1677
Publication Date: Feb 2007
Journal: European Journal of Operational Research
Authors: ,
Keywords: vehicle routing & scheduling, game theory, supply & supply chains
Abstract:

Capacity reservation provides a risk-sharing mechanism that encourages a manufacturer to expand its capacity more. We propose a deductible reservation (DR) contract where customers reserve future capacity with a fee that is deductible from the purchasing price. The manufacturer's ex ante announcement of the ‘excess’ capacity that she will have in addition to the reservation amount is a unique feature of the DR contract. An individually rational DR contract that provides channel coordination always exists. Since there is a unique Nash equilibrium for the reservation game among multiple customers, the main results of the one-customer case can be extended to the n-customer case. The DR contract is compared with another capacity reservation contract called take-or-pay. While the manufacturer may gain more profit under a take-or-pay contract, there may not be a channel-coordinated contract that is also individually rational for the customer. Finally, the similarities and differences between the capacity reservation contracts and other well-known supply contracts are discussed.

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