Internal auctions for the efficient sourcing of intermediate products

Abstract We examine the problem of setting production levels and selecting an internal supplier for a vital intermediate product. These decisions are being made in a decentralized environment involving internal suppliers that are profit centers with private cost information. Our analysis centers on the use of multi-dimensional auctions for facilitating communication between divisions and for implementing efficiency goals. We demonstrate analytically what the efficiency goals of the purchasing division should be and characterize necessary conditions of the auction process for implementing those efficiency goals.

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