Dynamic procurement in a capacitated supply chain facing uncertain demand

In an environment where a buyer procures capacity from a capacitated supplier through a wholesale price contract, the impact of timing of the decisions and of additional demand information on the supplier's pricing and the buyer's procurement decisions are investigated. As the selling season approaches, the buyer and the supplier have better information about the demand process. It is questioned as to what degree waiting until the demand uncertainty is resolved–given that such an option is feasible–is the best alternative for the supply chain partners. The main model is a two-period dynamic pricing/procurement game where the supplier sets wholesale prices dynamically; he sets the second period price after seeing the demand state as well as the buyer's first period procurement quantity. Two single-period models based on the information available to the players prior to their decisions are also studied. For each model, the subgame perfect Nash equilibrium is found in a closed form and the players' behaviors are analyzed to determine the impact of the additional information and trading periods on their welfare. The supplier's optimal capacity decision is also considered. Several additional insights are obtained through numerical experiments.