Competitive revenue management with forward and spot markets

Abstract

We consider a market with two capacity providers – an entrant and an incumbent – each with fixed capacity, who compete to sell in a spot market and a forward market. Prices are fixed and the providers make strategic capacity allocation decisions. The model is designed to study the competitive interactions between a low cost entrant, who sells at a lower price in both the forward and the spot market, and an established incumbent. The key question we investigate is the type of equilibrium behaviour we could expect from the two providers under different assumptions about market structure, demand and available capacity. We study two cases: (a) when there is a single buyer and (b) when there are multiple independent consumers. For the single buyer case, we identify the conditions under which the buyer would buy forward solely from the entrant or solely from the incumbent or from both. The conditions for the existence of a pure strategy Nash equilibrium for the game between the two providers are established. For the case of multiple independent consumers, we identify competitive strategies for the entrant and incumbent and establish conditions for a pure strategy Nash equilibrium. The results show how competitive considerations can motivate capacity providers to offer capacity in a forward market even in the absence of market segmentation.