n-newsvendor biform game of trading capacity futures

We consider a group of suppliers who have the same facilities and similar capabilities to produce goods with a very short lead-time for n retailers (newsvendors) who sell non-identical products. We treat such short lead-time capacity as a commodity that can be traded as futures to the retailers. In a two-stage inventory model, retailers buy physical goods and capacity futures as inventory portfolios in the first stage to determine their inventory positions in the selling season. After realization of demand is observed in the second stage, retailers make a replenishment decision that is limited to the capacity futures on hand. However, retailers are allowed to form coalitions to transfer the residual capacity futures among themselves. Therefore, retailers have bidirectional adjustments to their inventory positions. We prove that this mechanism is a good tool to induce suppliers to offer their capacities in the season, and the futures market provides a hedge for them. We employ a biform game to analyze the risk and payoff of retailers as players in both non-cooperative and cooperative stages. The Nash equilibrium in the first stage and the core in the second stage have been identified. Our findings suggest retailers can share risk among different supply chains with different products to mitigate inventory risk and improve their payoffs. However, the game discriminates against those retailers that have lower profit margin, lower inventory cost and lower lost sales penalty.