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Auctions for Procuring Options

Author

Listed:
  • James Schummer

    (Kellogg School of Management, MEDS Department, Northwestern University, Evanston, Illinois 60208)

  • Rakesh V. Vohra

    (Kellogg School of Management, MEDS Department, Northwestern University, Evanston, Illinois 60208)

Abstract

We examine the mechanism-design problem for a single buyer to procure purchase options for a homogeneous good when that buyer is required to satisfy an unknown future demand. Suppliers have two-dimensional types in the form of commitment costs and production costs. The efficient schedule of options depends on the distribution of demand. To implement an efficient outcome, we introduce a class of mechanisms which are essentially pivotal mechanisms (Vickrey-Clarke-Groves) with respect to the expected costs of the suppliers. We show that the computational task of running such mechanisms is not burdensome. Our discussion uses electricity markets as an example.

Suggested Citation

  • James Schummer & Rakesh V. Vohra, 2003. "Auctions for Procuring Options," Operations Research, INFORMS, vol. 51(1), pages 41-51, February.
    • Handle: RePEc:inm:oropre:v:51:y:2003:i:1:p:41-51
    DOI: 10.1287/opre.51.1.41.12804
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    References listed on IDEAS

    as
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    3. Gary D. Eppen & Ananth. V. Iyer, 1997. "Backup Agreements in Fashion Buying---The Value of Upstream Flexibility," Management Science, INFORMS, vol. 43(11), pages 1469-1484, November.
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    5. Lawrence M. Ausubel & Peter Cramton, 1998. "The Optimality of Being Efficient," Papers of Peter Cramton 98wpoe, University of Maryland, Department of Economics - Peter Cramton, revised 18 Jun 1999.
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    9. Moulin, H., 1986. "Characterizations of the pivotal mechanism," Journal of Public Economics, Elsevier, vol. 31(1), pages 53-78, October.
    10. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
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    Citations

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    Cited by:

    1. Martinez de Albeniz, Victor & Simchi-Levi, David, 2007. "Competition in the supply option market," IESE Research Papers D/718, IESE Business School.
    2. Venu Nagali & Jerry Hwang & David Sanghera & Matt Gaskins & Mark Pridgen & Tim Thurston & Patty Mackenroth & Dwight Branvold & Patrick Scholler & Greg Shoemaker, 2008. "Procurement Risk Management (PRM) at Hewlett-Packard Company," Interfaces, INFORMS, vol. 38(1), pages 51-60, February.
    3. Sebastian Just & Christoph Weber, 2015. "Strategic behavior in the German balancing energy mechanism: incentives, evidence, costs and solutions," Journal of Regulatory Economics, Springer, vol. 48(2), pages 218-243, October.
    4. Di Corato, Luca & Moretto, Michele, 2016. "Selling real assets: the impact of idiosyncratic project risk in an auction environment," Working Paper Series 2016:9, Swedish University of Agricultural Sciences, Department Economics.
    5. Edward Anderson & Bo Chen & Lusheng Shao, 2017. "Supplier Competition with Option Contracts for Discrete Blocks of Capacity," Operations Research, INFORMS, vol. 65(4), pages 952-967, August.
    6. Mohammad Rasouli & Demosthenis Teneketzis, 2021. "Economizing the Uneconomic: Markets for Reliable, Sustainable, and Price Efficient Electricity," Sustainability, MDPI, vol. 13(8), pages 1-38, April.
    7. Yonatan Gur & Lijian Lu & Gabriel Y. Weintraub, 2017. "Framework Agreements in Procurement: An Auction Model and Design Recommendations," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 586-603, October.
    8. Hua, Shengya & Liu, Jingchen & Cheng, T.C.E. & Zhai, Xin, 2019. "Financing and ordering strategies for a supply chain under the option contract," International Journal of Production Economics, Elsevier, vol. 208(C), pages 100-121.
    9. Victor Martínez-de-Albéniz & David Simchi-Levi, 2009. "Competition in the Supply Option Market," Operations Research, INFORMS, vol. 57(5), pages 1082-1097, October.

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