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Coordinating Supplier Competition via Auctions

This paper studies market schemes in which auctions are used to coordinate the buyer and competing suppliers in a procurement setting. While auction is typically considered a price-determination mechanism, it could also serve as a coordination mechanism. Possible auction and market mechanisms and their expected payoffs are analyzed in a two-supplier, one-buyer system. The auction mechanism could have a significant impact on the payoffs received by the players and on system efficiency. To establish basic insights, we first consider the case where the players have complete information on each others’ costs. This is followed by asymmetric information analysis where the players’ costs are private information while each supplier’s cost is known probabilistically. Channel coordination can be achieved with a two-part contract auction where the buyer announces a price-sensitive order function, and the suppliers compete in an ascending-bid side-payment auction. To achieve coordination, a thirdparty intermediary must prevent the buyer from manipulating the order function, thus truthfully transferring the market demand function to the suppliers. Insights from the analysis allow us to rank different market mechanisms by their impact on expected channel efficiency, and the expected payoffs for the buyer and the winning supplier. (