Mark R. Frascatore

Long-term and penalty contracts in a two-stage supply chain with stochastic demand

Abstract Recent applications of game-theoretic analysis to supply chain efficiency have focused on constructs between a buyer (the retailer or manufacturer ) and a seller (the supplier ) in successive stages of a supply chain. If demand for the final product is stochastic then the supplier has an incentive to keep its capacity relatively low to avoid creating unneeded capacity. The manufacturer, on the other hand, prefers the supplier’s capacity to be high to ensure that the final demand is satisfied. The manufacturer therefore constructs a contract to induce the supplier to increase its production capacity. Most research examines contracting when final demand is realized after the manufacturer places its order to the supplier. However, if final demand is realized before the manufacturer places its order to the supplier, these types of contracts can be ineffective. This paper examines two contracts under the latter timing scenario: long-term contracts in which the business relationship is repeated, and penalty contracts in which the supplier is penalized for too little capacity. Results indicate long-term contracts increase the profit potential of the supply chain. Furthermore, the penalty contracts can ensure that the supplier chooses a capacity level such that the full profit potential is achieved.

Public policy and R&D when research joint ventures are costly

In this paper we examine the role of policy when forming a R&D joint venture is costly. Contrary to previous studies, we document an active role for public policy, since the interests of firms are not necessarily aligned with societal interests. The nature of policy, however, depends on the joint venture cost. If it is relatively low, then policy may call for subsidizing the joint venture to encourage collaboration. If forming a joint venture is very costly, however, then there are cases where social welfare is improved if policy encourages R&D competition with no joint venture.

Staggered contracts and profitable entry deterrence: an application to professional sports

This paper examines an incumbent leagues entry-deterrence strategies in a professional-sports market. The strategy of staggering long-term contracts offered to star players is analyzed and shown to reduce the wage bill of an incumbent league. However, if long-term contracting reduces player effort, the incumbent balances the benefits of a lower wage bill with the cost of reduced sales revenues. An optimal contract duration in the presence of such moral hazard is characterized in terms of the parameterization of the model. Extensions to the model are also discussed.

On Vertical Differentiation Under Bertrand and Cournot: When Input Quality has Upward Sloping Supply

This paper compares Bertrand and Cournot duopolies in which firms can vertically differentiate their products and in which input quality has upward sloping supply. Contrary to previous results, if supply is either linear or convex with a high coefficient, firms differentiate their products equally under Bertrand and Cournot, with one firm choosing the minimum quality. If supply is convex with a low coefficient, firms differentiate more under Bertrand. Profit and welfare implications are discussed, as is the strategic choice of quality as an entry deterrence strategy.This paper compares Bertrand and Cournot duopolies in which firms can vertically differentiate their products and in which input quality has upward sloping supply. Contrary to previous results, if supply is either linear or convex with a high coefficient, firms differentiate their products equally under Bertrand and Cournot, with one firm choosing the minimum quality. If supply is convex with a low coefficient, firms differentiate more under Bertrand. Profit and welfare implications are discussed, as is the strategic choice of quality as an entry deterrence strategy.

Vertical Product Differentiation When Quality Is Scarce: The Case of n > 2 Firms

This paper describes a model of vertical product differentiation in which more than two firms compete in quality and price. Quality is of fixed supply, so firms participate in an auction to attain it. Firms then simultaneously choose prices. The paper determines equilibrium bids in the quality auction and the Bertrand equilibrium prices. In equilibrium one firm attains all the units of quality, but pays a price such that it, like the minimum-quality firms, earns zero profits. Aggregate welfare is computed, and is shown to decrease as competition increases.

The grouping of stars: An application to professional sports

Abstract This paper uses a two-period model to analyze competition for high-quality labor in a professional sports market. Leagues vertically differentiate their products by competing for the services of a small number of stars, thereby endogenizing the cost of product quality. If utility is linear or convex in the number of stars, one league successfully employs all of them. This grouping of stars results in an equilibrium market structure of either a monopoly or a duopoly, depending on the opportunity costs of players and the number of consumers. Market efficiency of the resulting equilibrium is then discussed.

Cost-sharing contracts and efficiency in a two-stage supply chain

This paper proposes an efficiency-enhancing contract mechanism in a two-stage supply chain. The model includes a buyer (the Original Equipment Manufacturer or OEM) who relies on a seller (the supplier) for key components. The self-interested supplier creates a level of capacity before demand is realised, but this level may not be optimal for the supply chain. Furthermore, the self-interested OEM may choose a suboptimal output price. The firms thus create a contract stipulating three factors: the OEMs output price, a fraction of the suppliers capacity costs to be paid by the OEM, and a fixed rebate paid from the supplier to the OEM. These factors can be chosen so that the efficient level of capacity is created, and both the suppliers and OEMs profits increase. Sensitivity analysis is then conducted to indicate the industry characteristics that make this type of contract most effective.

Preemptive Spacing With Vertical Differentiation When Input Quality is of Inelastic Supply

This paper examines a model of vertical differentiation in which an incumbent engages in preemptive spacing to prevent entry. Input quality is of fixed supply, and the incumbent prevents high-end entry by producing a product with all the quality available. It also commits to the production of a minimum-quality product to deter low-end entry. There is no entry in equilibrium, and the incumbent monopolist chooses to sell only its high-quality product. Commitment to the production of the minimum-quality product is used merely as a credible threat to vigorously compete should an entrant also produce a minimum-quality product.