Sourcine through auctions and audits

Ying Ju Chen, Sridhar Seshadri, Eitan Zemel

Research output: Contribution to journalArticle

Abstract

Buyers often find that obtaining complete information about suppliers is costly. In such scenarios, there is a trade-off between the costs of obtaining information and the benefits that accrue to the owners of such information. There are also various ways in which the missing information can be obtained or inferred. In this paper, we compare the efficiency of obtaining information via the classical mechanism design approach, which relies on the information available before the contracts are designed, with that of an "audit-based" approach, which relies on the information obtained after the fact. In our model, a single buyer (the Stackelberg leader) wishes to procure a package of products or services from various competing suppliers that possess private cost information. We allow for arbitrary cost and revenue functions and can incorporate multiple cost and revenue drivers. We show how the buyer can optimize her profit and at the same time coordinate the channel by using a contract scheme involving auctions, audits, and profit sharing. We also examine the behavior of this mechanism when the supplier can exert effort to reduce cost but the cost of effort cannot be verified. We propose several mechanisms for different precontract informational scenarios and compare their performance.

Original languageEnglish (US)
Pages (from-to)121-138
Number of pages18
JournalProduction and Operations Management
Volume17
Issue number2
DOIs
StatePublished - Mar 1 2008
Externally publishedYes

Keywords

  • Auditing
  • Information asymmetry
  • Procurement auction
  • Supply chain coordination

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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