Push or Pull? Auctioning Supply Contracts
32 Pages Posted: 1 Feb 2009 Last revised: 1 Apr 2009
Date Written: January 29, 2009
Abstract
Consider a buyer, facing uncertain demand, who sources from multiple suppliers via online procurement auctions (open descending price-only auctions). The suppliers have heterogeneous production costs, which are private information, and the winning supplier has to invest in production capacity before the demand uncertainty is resolved. The buyer chooses to offer a push or pull contract, for which the single price and winning supplier are determined via the auction. We show that with a pull contract, the buyer does not necessarily benefit from a larger number of suppliers participating in the auction, due to the negative effect of supplier competition on the incentive of supplier capacity investment. We thus propose an enhanced pull mechanism that mitigates this effect with a floor price. We then analyze and compare the outcomes of auctions for push and (enhanced) pull contracts, establishing when one form is preferred over the other based on the buyer's profits. We also compare our simple, price-only push and pull contract auctions to the optimal mechanisms, benchmarking the performance of the simple mechanisms as well as establishing the relative importance of auction design and contract design in procurement auctions.
Keywords: procurement auctions, push, pull, supply contracts, supply chain management
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Frank (youhua) Chen, Saibal Ray, ...
-
The Variety of Procurement Practice: Evidence from Public Procurement
By Laura Carpineti, Gustavo Piga, ...
-
Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand
-
By Saibal Ray, Yuyue Song, ...
-
Flexible Strategies for Centralized Public Procurement
By Gian Luigi Albano and Marco Sparro
-
Framework Agreements in Procurement: An Auction Model and Design Recommendations
By Yonatan Gur, Lijian Lu, ...
-
Optimal Replenishment and Pricing Decisions Under the Collect-on-Delivery Payment Scheme
By Jie Zhang and Rachel Zhang