Flexible procurement contracts for competing retailers

We consider a manufacturer that offers one or both retailers opportunities to purchase in advance before uncertainty in market size is resolved. When the retailers order in advance, they may order simultaneously, or only one of them may order. Upon receiving orders, the manufacturer produces and delivers them. After uncertainty is resolved, the retailers may trade stock with each other. In addition, they may purchase more from the manufacturer. We identify sufficient conditions for the existence of pure-strategy equilibria and obtain sufficient conditions for advance stage procurement and recourse stage trading to occur. These structural properties are used in a numerical study that sheds insights into the manufacturer’s and retailers’ procurement contract design preferences and how these preferences are affected by production cost structure and demand variability.