Procurement Financing in Shipping using Auctions

We study a risk management problem in ship capacity procurement where shipping companies must finance ship purchases in the face of uncertain demand. The company seeks to control capacity demand risk by selling a percentage of ship capacity to other companies. In order to facilitate this, we introduce an auction mechanism which the company can use to determine shared capacity and find partners. Acting as the auctioneer, the company announces a certain percentage of capacity to a set of buyers. The payment from the buyer is determined by auction and bidding strategy depends on two signals: the demand and thecompanies own financial position. For both the risk-neutral and risk-averse utility functions, we find a unique equilibrium for buyers, and a unique percentage of sharing capacity for the company. We study the performance of second-price auctions under this framework and find that the policy not only reduces the cost of financial friction of the company, but also increases overall utilization rates of capacity. Numerical experiments illustrate that the percentage of the payments from auction is usually higher than the percentage of the capacity shared with the partner allowing the firm to improve its performance significantly. And the seller will share more capacity to mitigate its demand risk if it becomes more risk-averse.