Designing Multi-Attribute Procurement Mechanisms for Assortment Planning
Posted: 20 Oct 2012 Last revised: 31 Jan 2014
Date Written: August 9, 2013
This research investigates how to design procurement mechanisms for assortment planning. A retailer buys directly from a manufacturer who possesses private information about the per unit variable cost and per variety setup cost. We first develop a screening model to assist the retailer in integrating assortment planning into supply chain procurement processes when only one manufacturer is available. We demonstrate that the screening mechanism is optimal among all feasible procurement strategies. When there are multiple competing manufacturers, we propose a supply contract auctioning mechanism and evaluate its performance. In this mechanism, the retailer announces a contract menu and the manufacturer that bids the highest upfront fee paid to the retailer wins the auction. The winner then chooses and executes a contract from the contract menu. We show that when the retailer uses the optimal screening contract menu as the object in the auction, it achieves the optimal procurement outcome if the screening contract menu does not pay rent to any manufacturer type. This finding sheds light on the connection between screening and auction mechanisms when there exists multi-dimensional private information.
Keywords: Assortment Planning, Multi-Dimensional Mechanism Design, Retail Supply Chain
JEL Classification: D82, M11
Suggested Citation: Suggested Citation