Simple Auctions for Supply Contracts

Izak Duenyas (), Bin Hu () and Damian R. Beil ()
Additional contact information
Izak Duenyas: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Bin Hu: Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599
Damian R. Beil: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109

Management Science, 2013, vol. 59, issue 10, 2332-2342

Abstract: This paper studies an optimal procurement mechanism for a newsvendor-like problem where the buyer's (newsvendor's) purchase price of the supplies is not fixed, but determined through interaction with candidate suppliers. The buyer has priors on the suppliers' costs but does not know their costs exactly. Recent literature has shown how the buyer can implement the optimal procurement mechanism by announcing a revenue function (specifying a payment for each quantity the buyer may purchase), then auctioning off the supply contract with the specified revenue function. In this paper, we show that a simple modified version of the standard open-descending auction for a fixed quantity is also an optimal mechanism for obtaining supplies. What distinguishes this mechanism is its simplicity and familiarity for the suppliers---open-descending auctions are very easy to run and ubiquitous in practice, whereas auctioning supply contracts with a specified revenue function is much less observed and more difficult to explain to suppliers. Furthermore, we show that this simple mechanism can be easily generalized to ex ante asymmetric suppliers and a class of nonlinear production costs. This paper was accepted by Yossi Aviv, operations management.

Keywords: newsvendor; optimal procurement mechanism; competing suppliers; open-descending auction (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1120.1705 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:59:y:2013:i:10:p:2332-2342

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().