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Efficient Auction Mechanisms for Supply Chain Procurement

Anderson Graduate School of Management, University of California at Riverside, Riverside, California 92521
School of Operations Research and Industrial Engineering, Cornell University, Ithaca, New York 14853
Department of Industrial Engineering and Engineering Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Stern School of Business, New York University, New York, New York 10012
rachel.chen{at}ucr.edu
robin{at}orie.cornell.edu
rzhang{at}ust.hk
gjanakir{at}stern.nyu.edu

We consider multiunit Vickrey auctions for procurement in supply chain settings. This is the first paper that incorporates transportation costs into auctions in a complex supply network. We first introduce an auction mechanism that makes simultaneous production and transportation decisions so that the total supply chain cost is minimized and induces truth telling from the suppliers. Numerical study shows that considerable supply chain cost savings can be achieved if production and transportation costs are considered simultaneously. However, the buyer's payments in such auctions can be high. We then develop a new Vickrey-type auction that incorporates the buyer's reservation price function into quantity allocation and payment decision. As a result, the buyer has some control over his payments at the expense of introducing uncertainty in the quantity acquired in the auction.

Key Words: mechanism design; VCG auctions; supply chain procurement
History: Received: May 9, 2002;

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