Optimal capacity provision for service providers with subsequent auctioning of projects

We investigate repeated sourcing events with service providers that have limited capacities. Sealed-bid reverse auctions are used to select the providers. A service provider that wins an auction has to allocate some capacity to the project for a certain duration. If all capacities are utilized, a provider is unable to participate in upcoming auctions until a project is finished. The decision problem for every service provider is to determine the optimal bidding strategy for a given capacity level and to set up the optimal capacity. Our research shows that, in repeated auctions, it is optimal for a provider to submit higher bids than in a single, non-repeated auction. In addition, we investigate how production times and the interarrival time of auctions influence the bidding behavior. Our findings show that the service providers׳ profits do not always increase with a higher capacity level. By studying a capacity game of two service providers, we show the potential existence of a prisoner׳s dilemma, which occurs when both providers increase capacity, even though they would have been better off with both having a lower capacity level. Finally, our results show a first-mover advantage when capacity decisions are sequential, rather than simultaneous.