Optimal Procurement Mechanisms for Assembly

Bin Hu () and Anyan Qi ()
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Bin Hu: Naveen Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080
Anyan Qi: Naveen Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080

Manufacturing & Service Operations Management, 2018, vol. 20, issue 4, 655-666

Abstract: This paper investigates mechanisms by which a powerful original equipment manufacturers procures multiple inputs for assembly from suppliers with privately informed costs, either simultaneously or sequentially. The optimal mechanisms always lead to matching purchase quantities of the inputs. Thus, quantity–payment contracts that implement the optimal mechanisms are contingent across suppliers (i.e., each supplier’s contract terms contain other suppliers’ private costs as variables), making the implementation impractical. To address this issue, we propose alternative implementations of the optimal mechanisms by menus of two-part tariff contracts that are noncontingent. In addition, optimal simultaneous and sequential procurement mechanisms for assembly are shown to be revenue-equivalent for all parties despite their different asymmetric information structures. Our findings suggest that procurement managers need not strategize contracting sequences for assembly, but should rather focus on achieving the best pricing with each supplier and coordinating purchase quantities.

Keywords: mechanism design; screening; two-part tariff; contracting timing; informed principal (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:20:y:2018:i:4:p:655-666

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