Optimal Procurement Auctions under Multistage Supplier Qualification

dc.contributor.ORCID0000-0001-6956-0856 (Dawande, MW)
dc.contributor.ORCID0000-0001-7386-4318 (Jamakiraman, G)
dc.contributor.authorChen, W.
dc.contributor.authorDawande, Milind W.
dc.contributor.authorJanakiraman, Ganesh
dc.contributor.utdAuthorDawande, Milind W.
dc.contributor.utdAuthorJanakiraman, Ganesh
dc.date.accessioned2019-10-18T21:33:19Z
dc.date.available2019-10-18T21:33:19Z
dc.date.created2018-04-25
dc.description.abstractWe consider a firm that solicits bids from a fixed-sized pool of yet-to-be qualified suppliers for an indivisible contract. The contract can only be awarded to a supplier who passes a multistage qualification process. For each stage of the qualification process, the buyer incurs a fixed testing cost for each supplier she chooses to test. The buyer seeks an optimal mechanism-that is, one that minimizes her total expected cost. Motivated by the buyer's urgency (or the lack of it) of time for completing the qualification process, we obtain optimal mechanisms for two testing environments: (1) simultaneous testing, where in each stage, the buyer selects a subset of those suppliers who have passed all the previous stages and tests them simultaneously; and (2) nonsimultaneous testing, where the simultaneous-testing requirement is not imposed. Under simultaneous testing, the admission policy for selecting suppliers at each stage is based on nonuniformreserve-price thresholds. Under nonsimultaneous testing, too, the admission policy is threshold based, but the selection process is sequential in nature. The relative increase in cost due to the simultaneous-testing requirement is (under a mild condition) monotonically increasing in the number of suppliers, the expected multistage testing cost, and the overall passing probability. We also study the optimal sequencing of the qualification stages and show that the buyer should schedule the stages in increasing order of the ratio of their testing cost to their failing probability. Finally, for the simpler setting of a single-stage qualification process and a single supplier, we study a two-dimensional mechanism design problem where, in addition to cost, the passing probability is also private to the supplier. Here, too, threshold-based admission remains optimal, and the buyer offers either a pooling or a separating contract. Copyright: ©2018 INFORMS.
dc.description.departmentNaveen Jindal School of Management
dc.identifier.bibliographicCitationChen, W., M. Dawande, and G. Janakiraman. 2018. "Optimal procurement auctions under multistage supplier qualification." Manufacturing and Service Operations Management 20(3): 566-582, doi: 10.1287/msom.2017.0664
dc.identifier.issn1523-4614
dc.identifier.issue3
dc.identifier.urihttps://hdl.handle.net/10735.1/7019
dc.identifier.volume20
dc.language.isoen
dc.publisherINFORMS
dc.relation.urihttp://dx.doi.org/10.1287/msom.2017.0664
dc.rightsThis article may be used only for the purposes of research, teaching, and/or private study. Commercial use or systematic downloading (by robots or other automatic processes) is prohibited without explicit Publisher approval, unless otherwise noted. For more information, contact permissions@informs.org.
dc.rights©2018 INFORMS
dc.source.journalManufacturing and Service Operations Management
dc.subjectMechanism design
dc.subjectTesting, Multistage
dc.subjectAuctions
dc.subjectMachine design
dc.subjectProbabilities
dc.subjectSales
dc.subjectCost
dc.titleOptimal Procurement Auctions under Multistage Supplier Qualification
dc.type.genrearticle

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