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Mechanism design for capacity allocation with price competition

Published: 19 August 2008 Publication History

Abstract

Studies on mechanism design mostly focus on a single market where sellers and buyers trade. This paper examines the problem of mechanism design for capacity allocation in two connected markets where a supplier allocates products to a set of retailers and the retailers resale the products to end-users in price competition. We consider the problems of how allocation mechanisms in the upstream market determine the behaviors of markets in the downstream market and how pricing policy in the downstream market influences the properties of allocation mechanisms. We classify an effective range of capacity that influences pricing strategies in the downstream market according to allocated quantities. Within the effective capacity range, we show that the retailers tend to inflate orders under proportional allocation, but submit truthful orders under uniform allocation. We observe that heterogeneous allocations results in greater total retailer profit which is a unique phenomenon in our model. The results would be applied to the design and analysis of Business-to-Business (B2B) marketplaces and supply chain management.

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Cited By

View all
  • (2014)Full length articlePhysical Communication10.1016/j.phycom.2014.03.00112(63-78)Online publication date: 1-Sep-2014
  • (2011)Capacity AllocationWiley Encyclopedia of Operations Research and Management Science10.1002/9780470400531.eorms0132Online publication date: 14-Jan-2011
  • (2009)Online Network Resource Allocation Mechanism with the Continuous High SatisfactionProceedings of the 2009 Second International Symposium on Information Science and Engineering10.1109/ISISE.2009.32(254-258)Online publication date: 26-Dec-2009

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Reviews

Barrett Hazeltine

Allocating capacity in two connected markets is problematic: a supplier allocates the product to retailers, who then allocate it to end users. A principal result is that if uniform allocation is used-that is, wholesalers allocate products uniformly to retailers-then retailers do best by placing truthful orders. If a proportional allocation is used, wholesalers allocate according to the size of the order, then retailers do best by inflating orders, and no equilibrium set of order sizes exists. The analysis is extended to cases where order sizes must be less than a maximum, both when the maximum is the same for all retailers and when the maximum is not uniform. Results are given for how retailers will set prices under various capacity constraints, including what the resulting profits will be. The treatment is mathematical. A simplified statement of Theorem 1, for example, is: Given an allocation mechanism g . Suppose that K = q M and g is efficient. If g is feasible, then P ( K ) is an equilibrium, where K is the quantity of goods, q M is the quantity a retailer holding a monopoly would sell, and P ( K ) is the market price corresponding to the quantity K . The paper places the results in the context of related work. Computers are not mentioned in the paper. The results might be useful in designing supply-chain decision systems, although the exposition is not easy to follow. Online Computing Reviews Service

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cover image ACM Other conferences
ICEC '08: Proceedings of the 10th international conference on Electronic commerce
August 2008
355 pages
ISBN:9781605580753
DOI:10.1145/1409540
Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. Copyrights for components of this work owned by others than ACM must be honored. Abstracting with credit is permitted. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. Request permissions from [email protected]

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Publication History

Published: 19 August 2008

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Author Tags

  1. allocation mechanism design
  2. oligopoly
  3. supply chain management

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ICEC08
ICEC08: 10th International Conference on E-Commerce
August 19 - 22, 2008
Innsbruck, Austria

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Cited By

View all
  • (2014)Full length articlePhysical Communication10.1016/j.phycom.2014.03.00112(63-78)Online publication date: 1-Sep-2014
  • (2011)Capacity AllocationWiley Encyclopedia of Operations Research and Management Science10.1002/9780470400531.eorms0132Online publication date: 14-Jan-2011
  • (2009)Online Network Resource Allocation Mechanism with the Continuous High SatisfactionProceedings of the 2009 Second International Symposium on Information Science and Engineering10.1109/ISISE.2009.32(254-258)Online publication date: 26-Dec-2009

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