Competition for Procurement Contracts with Service Guarantees

We consider a market with two suppliers and a set of buyers in search of procurement contracts with one of the suppliers. In particular, each buyer needs to process a certain volume of work, and each supplier’s ability to process the customers’ requests is constrained by a production capacity. The procurement contracts include guarantees that the products will be available when needed, and the buyers select a supplier based on their service delivery offers. The suppliers are modeled as make-to-stock queues and compete for the buyers’ businesses. The main objective of the paper is to determine how the procurement contracts are established between buyers and suppliers. Since each buyer selects a single supplier to establish the sourcing relationship, the game fails to have a pure strategy Nash equilibrium. Instead, an equilibrium is defined as the limit equilibrium of some discrete action games.