Information Economics and Policy
Electronic markets and electronic hierarchies
Communications of the ACM
Backup agreements in fashion buying—the value of upstream flexibility
Management Science
The Quantity Flexibility Contract and Supplier-Customer Incentives
Management Science
Quantitative Models for Supply Chain Management
Quantitative Models for Supply Chain Management
Coordination and Flexibility in Supply Contracts with Options
Manufacturing & Service Operations Management
The Impact of the Secondary Market on the Supply Chain
Management Science
The role of e-marketplaces in relationship-based supply chains: a survey
IBM Systems Journal
Competitive Options, Supply Contracting, and Electronic Markets
Management Science
Supply Auctions and Relational Contracts for Procurement
Manufacturing & Service Operations Management
Codifiability, Relationship-Specific Information Technology Investment, and Optimal Contracting
Journal of Management Information Systems
Strategic Spot Trading in Supply Chains
Management Science
Multiple Sourcing and Procurement Process Selection with Bidding Events
Management Science
Competition in the Supply Option Market
Operations Research
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We analyze the structure and pricing of option contracts for an industrial good in the presence of spot trading. We combine the analysis of spot trading and buyers' disparate private valuations for different suppliers' products, and we jointly endogenize the determination of three major dimensions in contract design: (i) sales contracts versus options contracts, (ii) flat-price versus volume-dependent contracts, and (iii) volume discounts versus volume premia. We build a model in which a supplier of an industrial good transacts with a manufacturer who uses the supplier's product to produce an end good with an uncertain demand. We show that, consistent with industry observations, volume-dependent optimal sales contracts always demonstrate volume discounts (i.e., involve concave pricing). However, options are more complex agreements, and optimal option contracts can involve both volume discounts and volume premia. Three major contract structures commonly emerge in optimality. First, if the seller has a high discount rate relative to the buyer and the seller's production costs or the production capacity is low, the optimal contracts tend to be flat-price sales contracts. Second, when the seller has a relatively high discount rate compared to the buyer but production costs or production capacity are high, the optimal contracts are sales contracts with volume discounts. Third, if the buyer's discount rate is high relative to the seller's, then the optimal contracts tend to be volume-dependent options contracts and can involve both volume discounts and volume premia. However, when the seller's production capacity is sufficiently low, it is possible to observe flat-price option contracts. Furthermore, we provide links between production and spot market characteristics, contract design, and efficiency.