Strategic procurement in spot and forward markets considering regulation and capacity constraints.

Oliveira, Fernando S.

Abstract

With the generalization of business-to-business electronic exchanges, online spot markets have become an important component of suppliers' procurement strategies in their aim to increase flexibility and reduce transaction costs. In this article we analyze, both analytically and computationally, how these online spot markets interact with forward contracts as strategic procurement tools. We consider non-storable commodity markets in which the suppliers have market power. We derive the equations describing the equilibrium of this game considering capacity constraints and regulation. We show that price caps increase forward trading and we analyze the conditions under which, in the capacitated model, some suppliers can buy forward to sell spot. Furthermore, we prove that inefficient producers continue to operate in the market as arbitrageurs, selling forward and buying spot. We model the game with asymmetric suppliers, identifying the situations in which it is well defined, and describing how these asymmetries are important for market equilibrium. Finally, we analyze a game with multiple sequential forward contracts: we prove that, when suppliers readjust their forward positions until the start of the spot market, the number of time periods (i.e., market liquidity) has neither effect on the suppliers' strategic procurement nor on market efficiency.

Citation

OLIVEIRA, F.S. 2017. Strategic procurement in spot and forward markets considering regulation and capacity constraints. European journal of operational research [online], 261(2), pages 540-548. Available from: https://doi.org/10.1016/j.ejor.2017.01.052

• Journal Article Type: Article
• Acceptance Date: Jan 31, 2017
• Online Publication Date: Feb 27, 2017
• Publication Date: Sep 1, 2017
• Deposit Date: Oct 21, 2023
• Publicly Available Date: Nov 15, 2023
• Journal: European journal of operational research
• Print ISSN: 0377-2217
• Electronic ISSN: 1872-6860
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 261
• Issue: 2
• Pages: 540-548
• DOI: https://doi.org/10.1016/j.ejor.2017.01.052
• Keywords: Supply chain management; Forward contracts; Oligopolies; Procurement; Market regulation; Spot markets
• Public URL: https://rgu-repository.worktribe.com/output/2079484