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A Smart Market for Industrial Procurement with Capacity Constraints

Author

Listed:
  • Jérémie Gallien

    (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, Massachusetts 02142)

  • Lawrence M. Wein

    (Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, California 94306)

Abstract

We address the problem of designing multi-item procurement auctions for a monopsonistic buyer in capacity-constrained environments. Using insights from classical auction theory, we construct an optimization-based auction mechanism (Üsmart marketÝ) relying on the dynamic resolution of a linear program minimizing the buyer's cost under the suppliers' capacity constraints. Suppliers can modify their offers in response to the optimal allocation corresponding to each set of bids, giving rise to a dynamic competitive bidding process. To assist suppliers, we also develop a bidding-suggestion device based on a myopic best-response (MBR) calculation that solves an associated optimization problem. Assuming linear costs for the suppliers, we study within a game-theoretic framework the sequence of bids arising in this smart market. Under a weak behavioral assumption and some symmetry requirements, an explicit upper bound for the winning bids is established. We then formulate a complete behavioral model and solution methodology based on the MBR rationale and show that the bounds derived earlier continue to hold. We analytically derive some structural and convergence properties of the MBR dynamics in the simplest nontrivial market environment, which suggests further possible design improvements, and investigate bidding dynamics and incentive compatibility issues via numerical simulations.

Suggested Citation

  • Jérémie Gallien & Lawrence M. Wein, 2005. "A Smart Market for Industrial Procurement with Capacity Constraints," Management Science, INFORMS, vol. 51(1), pages 76-91, January.
  • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:1:p:76-91
    DOI: 10.1287/mnsc.1040.0230
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    References listed on IDEAS

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    Cited by:

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    2. Rachel R. Chen & Robin O. Roundy & Rachel Q. Zhang & Ganesh Janakiraman, 2005. "Efficient Auction Mechanisms for Supply Chain Procurement," Management Science, INFORMS, vol. 51(3), pages 467-482, March.
    3. Zhiling Guo & Gary J. Koehler & Andrew B. Whinston, 2012. "A Computational Analysis of Bundle Trading Markets Design for Distributed Resource Allocation," Information Systems Research, INFORMS, vol. 23(3-part-1), pages 823-843, September.
    4. Ye, Qing Chuan & Zhang, Yingqian & Dekker, Rommert, 2017. "Fair task allocation in transportation," Omega, Elsevier, vol. 68(C), pages 1-16.
    5. Birgit Heydenreich & Rudolf Müller & Marc Uetz, 2010. "Mechanism Design for Decentralized Online Machine Scheduling," Operations Research, INFORMS, vol. 58(2), pages 445-457, April.
    6. Wedad J. Elmaghraby & Elena Katok & Natalia Santamaría, 2012. "A Laboratory Investigation of Rank Feedback in Procurement Auctions," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 128-144, January.
    7. Kokott, Gian-Marco & Bichler, Martin & Paulsen, Per, 2019. "The beauty of Dutch: Ex-post split-award auctions in procurement markets with diseconomies of scale," European Journal of Operational Research, Elsevier, vol. 278(1), pages 202-210.
    8. Zhang, Juliang & Xiang, Jie & Cheng, T.C. Edwin & Hua, Guowei & Chen, Cheng, 2019. "An optimal efficient multi-attribute auction for transportation procurement with carriers having multi-unit supplies," Omega, Elsevier, vol. 83(C), pages 249-260.
    9. Andor Goetzendorff & Martin Bichler & Pasha Shabalin & Robert W. Day, 2015. "Compact Bid Languages and Core Pricing in Large Multi-item Auctions," Management Science, INFORMS, vol. 61(7), pages 1684-1703, July.
    10. Gérard P. Cachon & Fuqiang Zhang, 2007. "Obtaining Fast Service in a Queueing System via Performance-Based Allocation of Demand," Management Science, INFORMS, vol. 53(3), pages 408-420, March.
    11. Budde, Maximilian & Minner, Stefan, 2015. "Optimal capacity provision for service providers with subsequent auctioning of projects," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 652-662.
    12. Martin Bichler & Pasha Shabalin & Georg Ziegler, 2013. "Efficiency with Linear Prices? A Game-Theoretical and Computational Analysis of the Combinatorial Clock Auction," Information Systems Research, INFORMS, vol. 24(2), pages 394-417, June.
    13. Leon Yang Chu & Zuo-Jun Max Shen, 2008. "Truthful Double Auction Mechanisms," Operations Research, INFORMS, vol. 56(1), pages 102-120, February.
    14. Zhiling Guo & Gary J. Koehler & Andrew B. Whinston, 2007. "A Market-Based Optimization Algorithm for Distributed Systems," Management Science, INFORMS, vol. 53(8), pages 1345-1358, August.
    15. Jingtang Ma & Shan Yang, 2024. "High-dimensional stochastic control models for newsvendor problems and deep learning resolution," Annals of Operations Research, Springer, vol. 339(1), pages 789-811, August.
    16. Martin Bichler & Alok Gupta & Wolfgang Ketter, 2010. "Research Commentary ---Designing Smart Markets," Information Systems Research, INFORMS, vol. 21(4), pages 688-699, December.
    17. Wang, Haifeng & Chen, Bocheng & Yan, Houmin, 2010. "Optimal inventory decisions in a multiperiod newsvendor problem with partially observed Markovian supply capacities," European Journal of Operational Research, Elsevier, vol. 202(2), pages 502-517, April.
    18. Verwer, S. & Zhang, Y., 2011. "Revenue Prediction in Budget-constrained Sequential Auctions with Complementarities," ERIM Report Series Research in Management ERS-2011-020-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    19. Ketter, W., 2014. "Envisioning and Enabling Sustainable Smart Markets," ERIM Inaugural Address Series Research in Management EIA-2014-057-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam..
    20. Bichler, Martin & Schneider, Stefan & Guler, Kemal & Sayal, Mehmet, 2011. "Compact bidding languages and supplier selection for markets with economies of scale and scope," European Journal of Operational Research, Elsevier, vol. 214(1), pages 67-77, October.

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