Compact bidding languages and supplier selection for markets with economies of scale and scope

• Published in: European journal of operational research 2011-10, Vol.214 (1), p.67-77
• Main Authors: Bichler, Martin, Schneider, Stefan, Guler, Kemal, Sayal, Mehmet
• Format: Article
• Language: English
• Subjects: Applied sciences; Auctions; Auctions/bidding; bidding E-commerce; Bids; Combinatorial analysis; Computation; Cost control; Decision support systems; Decision support systems Auctions; Decision theory. Utility theory; Discounts; E-commerce; Economic theory; Economics; Economies of scale; Exact sciences and technology; Firm modelling; General aspects; Logistics; Markets; Operational research and scientific management; Operational research. Management science; Optimization; Optimization algorithms; Purchasing; Studies; Suppliers; Volume discount
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2011.03.048

► We introduce a bidding language for markets with economies of scale and scope. ► We propose a mixed integer program to solve the supplier selection problem. ► We discuss the impact of language features on computational effort and total spend. ► We conclude that practically relevant problem sizes can be solved to optimality. Combinatorial auctions have been used in procurement markets with economies of scope. Preference elicitation is already a problem in single-unit combinatorial auctions, but it becomes prohibitive even for small instances of multi-unit combinatorial auctions, as suppliers cannot be expected to enumerate a sufficient number of bids that would allow an auctioneer to find the efficient allocation. Auction design for markets with economies of scale and scope are much less well understood. They require more compact and yet expressive bidding languages, and the supplier selection typically is a hard computational problem. In this paper, we propose a compact bidding language to express the characteristics of a supplier’s cost function in markets with economies of scale and scope. Bidders in these auctions can specify various discounts and markups on overall spend on all items or selected item sets, and specify complex conditions for these pricing rules. We propose an optimization formulation to solve the resulting supplier selection problem and provide an extensive experimental evaluation. We also discuss the impact of different language features on the computational effort, on total spend, and the knowledge representation of the bids. Interestingly, while in most settings volume discount bids can lead to significant cost savings, some types of volume discount bids can be worse than split-award auctions in simple settings.