Optimal Procurement Mechanisms for Assembly
24 Pages Posted: 24 Jul 2015 Last revised: 31 Jul 2018
Date Written: August 15, 2017
This paper investigates mechanisms by which a powerful OEM procures multiple inputs for assembly from suppliers with privately informed costs, either simultaneously or sequentially. The optimal mechanisms always lead to matching purchase quantities of the inputs. Thus, quantity-payment contracts that implement the optimal mechanisms are contingent across suppliers (i.e., each supplier’s contract terms contain other suppliers’ private costs as variables), making the implementation impractical. To address this issue, we propose alternative implementations of the optimal mechanisms by menus of two-part tariff contracts that are non-contingent. In addition, optimal simultaneous and sequential procurement mechanisms for assembly are shown to be revenue-equivalent for all parties, despite their differing asymmetric information structures. Our findings suggest that procurement managers need not strategize contracting sequences for assembly, but should rather focus on achieving the best pricing with each supplier and coordinating purchase quantities.
Keywords: mechanism design, screening, two-part tariff, contracting timing, informed principal
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