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Aggregate production planning for process industries under oligopolistic competition

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  • Karmarkar, Uday S.
  • Rajaram, Kumar
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    Abstract

    We consider a competitive version of the traditional aggregate production planning model with capacity constraints. In the general case, multiple products are produced by a few competing producers (oligopoly) with limited capacities. Production quantities, prices and consequently profits depend on production and allocation decisions of each producer. In addition, there is competition for the raw material whose supplies are limited, and where prices reflect these limitations. Such situations have recently occurred in several process industry settings including petro-refining, petrochemicals, basic chemicals, cement, fertilizers, pharmaceuticals, rubber, paper, food processing and metals. We use a successive “Bertrand–Cournot” framework to address this problem and to determine optimal production quantities, prices and profits at the producers and at the raw material supplier. Our analysis allows a new way to understand and evaluate the marginal value of additional capacity when there is competition for the market and raw materials.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 223 (2012)
    Issue (Month): 3 ()
    Pages: 680-689

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    Handle: RePEc:eee:ejores:v:223:y:2012:i:3:p:680-689

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Aggregate production planning; Competition; Process industry; Nonlinear programming;

    References

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    1. Fernando Bernstein & Gregory A. DeCroix, 2004. "Decentralized Pricing and Capacity Decisions in a Multitier System with Modular Assembly," Management Science, INFORMS, vol. 50(9), pages 1293-1308, September.
    2. Charles J. Corbett & Uday S. Karmarkar, 2001. "Competition and Structure in Serial Supply Chains with Deterministic Demand," Management Science, INFORMS, vol. 47(7), pages 966-978, July.
    3. Uday Karmarkar & Richard Pitbladdo, 1993. "Internal Pricing and Cost Allocation in a Model of Multiproduct Competition with Finite Capacity Increments," Management Science, INFORMS, vol. 39(9), pages 1039-1053, September.
    4. Leonard F. Herk, 1993. "Consumer Choice and Cournot Behavior in Capacity-Constrained Duopoly Competition," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 399-417, Autumn.
    5. Greenhut, M L & Ohta, H, 1979. "Vertical Integration of Successive Oligopolists," American Economic Review, American Economic Association, vol. 69(1), pages 137-41, March.
    6. Griffin, James M, 1985. "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, American Economic Association, vol. 75(5), pages 954-63, December.
    7. Karmarkar, Uday & Pitbladdo, Richard, 1994. "Product-line selection, production decisions and allocation of common fixed costs," International Journal of Production Economics, Elsevier, vol. 34(1), pages 17-33, February.
    8. Fred Hanssmann & Sidney W. Hess, 1960. "A Linear Programming Approach to Production and Employment Scheduling," Management Science, INFORMS, vol. 0(1), pages 46-51, January.
    9. Ziss, Steffen, 1995. "Vertical Separation and Horizontal Mergers," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 63-75, March.
    10. Fernando Bernstein & Awi Federgruen, 2005. "Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty," Management Science, INFORMS, vol. 51(1), pages 18-29, January.
    11. Abiru, Masahiro, 1988. "Vertical Integration, Variable Proportions and Successive Oligopolies," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 315-25, March.
    12. Scott M. Carr & Uday S. Karmarkar, 2005. "Competition in Multiechelon Assembly Supply Chains," Management Science, INFORMS, vol. 51(1), pages 45-59, January.
    13. Haskel, Jonathan & Martin, Christopher, 1994. "Capacity and Competition: Empirical Evidence on UK Panel Data," Journal of Industrial Economics, Wiley Blackwell, vol. 42(1), pages 23-44, March.
    14. Nam, Sang-jin & Logendran, Rasaratnam, 1992. "Aggregate production planning -- A survey of models and methodologies," European Journal of Operational Research, Elsevier, vol. 61(3), pages 255-272, September.
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