Push or Pull? Auctioning Supply Contracts

32 Pages Posted: 1 Feb 2009 Last revised: 1 Apr 2009

See all articles by Cuihong Li

Cuihong Li

University of Connecticut - Department of Operations & Information Management

Alan Andrew Scheller-Wolf

Carnegie Mellon University

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

Li, Cuihong and Scheller-Wolf, Alan Andrew, Push or Pull? Auctioning Supply Contracts (January 29, 2009). Available at SSRN: https://ssrn.com/abstract=1335049 or http://dx.doi.org/10.2139/ssrn.1335049

Cuihong Li (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Alan Andrew Scheller-Wolf

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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