Incentive compatible supply chain auctions

We address supply chain formation-the problem of coordinating the buying and selling of goods in multiple markets across a supply chain-as a mechanism design problem. Our basic assumption is that each agent has private information about its cost of providing a service or about its value for purchasing a set of goods it desires. Because effective negotiation strategies in the presence of such private information can be difficult to design, we focus on incentive compatible mechanisms. In such mechanisms, the agents' dominant strategy is to simply report their private information truthfully. Unfortunately, with two-sided negotiation, characteristic of supply chains, it is impossible to simultaneously achieve three desirable properties with incentive compatibility: perfect efficiency, budget balance, and individual rationality. In this chapter we address this impossibility and describe auctions that are incentive compatible, individually rational and budget balanced, and guarantee high, but not perfect efficiency. We describe auctions for various assumptions regarding the supply chain topologies and the private information the agents have about their technologies. We discuss economic properties of the auctions, as well as computational efficiency and distributed implementation of the auctions.