Multi-attribute procurement contracts

Zhaolin Li, Jennifer K. Ryan and Daewon Sun

International Journal of Production Economics, 2015, vol. 159, issue C, 137-146

Abstract: We consider the design of multi-attribute procurement contracts when the supplier possesses multi-dimensional private information. Specifically, we consider a buyer who must design a contract to procure a single product whose value is a function of two attributes. The potential supplier׳s cost structure is two-dimensional, including one component for each attribute, and is unknown to the buyer. In contrast to the existing one-dimensional models, we find that in some cases the buyer can extract all of the channel profits without distorting the specifications of the final product, and we identify conditions under which that will be the case. In other words, with more dimensions to leverage, the buyer may be able to discern the supplier׳s type without paying any information rents, thus reducing her procurement costs. It is also possible that the buyer can extract all the channel profits by distorting the product specifications downward. Finally, we demonstrate how our results can be extended to a setting with multiple customer classes, where the valuation for the product attributes varies across the classes. We find that greater differentiation in customer valuation leads to a setting in which the buyer is less likely to extract all of the channel profit without distortion.

Keywords: Procurement; Multi-dimensional screening; Competition; Market segmentation (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:159:y:2015:i:c:p:137-146

DOI: 10.1016/j.ijpe.2014.09.032

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