E-Commerce

Procurement From Multiple Suppliers Using Options

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Executive Summary

This paper studies the design of procurement mechanisms when a manufacturer purchases from multiple suppliers that are heterogeneous in their production costs and salvage values. The option to purchase from different suppliers helps the manufacturer hedge against demand risk. The authors first consider the case when the set of suppliers' cost parameters is public information. This paper proposes a simple mechanism that achieves efficiency and allows the manufacturer to extract full surplus from the suppliers.

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