Combinatorial Auctions in the Procurement of Transportation Services

Most shippers use annual auctions to procure transportation services, leading to annual contracts. By using combinatorial auctions they can reduce their operating costs while protecting carriers from winning lanes that do not fit their networks, thereby improving carriers' operations as well. Combinatorial auctions account for carriers' economies of scope, which many consider more important than economies of scale in transportation operations. Any transportation procurement procedure, however, must account for level of service and other nonprice variables, which are as important as price in determining which carrier should serve what lane. These considerations can be incorporated into the combinatorial auction framework easily and holistically. After several years of using this approach, leading shippers have adopted it, and several software providers offer the requisite software.

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