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Optimal Service-Based Competition With Heterogeneous Suppliers, Ehsan Elahi, Saif Benjaafar, Karen L. Donohue

Ehsan Elahi

We investigate how a competition can be designed to maximize expected profit for a buyer who wishes to allocate demand among a diverse set of suppliers when his profit is dependent on the supplier’s service levels. The candidate suppliers are heterogeneous in their capacities and cost structures, and compete for shares of the buyer’s demand based on their promised service levels. To characterize the optimal competition, we first identify a family of allocation functions that are service maximizing, meaning they can intensify the competition to a point where each supplier provides its maximum feasible service level and the outcome of …