Correspondence: Srinivas Krishnamoorthy, Richard Ivey School of Business, The University of Western Ontario, 1151 Richmond Street North, London, ON, Canada N6A 3K7. E-mail: skrishnamoorthy@ivey.ca

¹is Professor at the Department of Industrial Engineering & Operations Research at Columbia University. He has published influential papers in the leading journals of his field where he has also occupied a variety of editorial positions. He has consulted for large corporations such as IBM, Lucent and Northwest Airlines, and government agencies such as the National Research Council and the National Science Foundation. His graduate students are associated with prestigious universities. He spent his 1996–1997 sabbatical at Stanford University and was a visiting scientist at the IBM Watson Research Center from 1999 to 2003. He was the chairman of the IEOR Department from July 2002 to June 2008.

²is an Assistant Professor of Management Science at the Richard Ivey School of Business, The University of Western Ontario. His interests include models for revenue management and pricing, game theory and spreadsheet engineering.

³is Professor at the Columbia University School of Business. He is also Founder and Chief Science Officer of Nomis Solutions, a software company focused on pricing and profitability management for banks and financial service institutions. Before founding Nomis, Dr Phillips served as Chief Technology Officer of Manugistics and as Chief Executive Officer of Talus Solutions. He is author of the book, Pricing and Revenue Optimization.

Received 27 January 2009; Revised 27 January 2009; Published online 12 June 2009.

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.