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Incentive‐Compatible in Dominant Strategies Mechanism Design for an Assembler under Asymmetric Information

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  • Zhaolin Li
  • Jennifer K. Ryan
  • Lusheng Shao
  • Daewon Sun

Abstract

Assembly systems, in which various components are sourced from multiple suppliers and assembled into the final product, which is sold to external customers, are found in a variety of industries. In many practical settings, the assembler possesses incomplete information regarding the marginal cost of each supplier. This lack of complete information poses a challenge for the assembler in designing contract mechanisms. In this study, we investigate the assembler's contract design problem by proposing a contracting mechanism that can significantly outperform an alternative mechanism that was previously presented in the literature, especially when the uncertainty regarding customer demand is significant. Our mechanism is incentive compatible in dominating strategies (ICDS) and maximizes the assembler's expected profit while ensuring that every supplier truthfully reveals their own production cost, regardless of how the other suppliers might behave. In this ICDS mechanism, the assembler orders the same number of components from each supplier. This ‘balanced ordering’ property does not hold for the alternative mechanism from the literature. Finally, to simplify the proposed ICDS mechanism, we introduce a hybrid mechanism, under which the complexity of the contract offered to a given supplier depends on the importance of that supplier to the assembler's overall profit. We conduct a set of numerical experiments to demonstrate that, in many cases, this proposed hybrid mechanism provides performance close to that of the optimal mechanism, and can significantly outperform the alternative mechanism from the literature.

Suggested Citation

  • Zhaolin Li & Jennifer K. Ryan & Lusheng Shao & Daewon Sun, 2019. "Incentive‐Compatible in Dominant Strategies Mechanism Design for an Assembler under Asymmetric Information," Production and Operations Management, Production and Operations Management Society, vol. 28(2), pages 479-496, February.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:2:p:479-496
    DOI: 10.1111/poms.12929
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    Cited by:

    1. Li, Zhaolin & Qian, Cheng & Ryan, Jennifer K. & Sun, Daewon, 2022. "Robust mechanism design and production structure for assembly systems with asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 301(2), pages 609-623.
    2. Andrew M. Davis & Bin Hu & Kyle Hyndman & Anyan Qi, 2022. "Procurement for Assembly Under Asymmetric Information: Theory and Evidence," Management Science, INFORMS, vol. 68(4), pages 2694-2713, April.
    3. Jie Yang & Fang He & Xi Lin & Max Zuo‐Jun Shen, 2021. "Mechanism Design for Stochastic Dynamic Parking Resource Allocation," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3615-3634, October.
    4. Lv, Fei & Xiao, Lei & Xu, Minghui & Guan, Xu, 2019. "Quantity-payment versus two-part tariff contracts in an assembly system with asymmetric cost information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 129(C), pages 60-80.
    5. Lan, Yanfei & Cai, Xiaoqiang & Shang, Changjing & Zhang, Lianmin & Zhao, Ruiqing, 2020. "Heterogeneous suppliers’ contract design in assembly systems with asymmetric information," European Journal of Operational Research, Elsevier, vol. 286(1), pages 149-163.

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