Effects of Information Disclosure Under First- and Second-Price Auctions in a Supply Chain Setting

We consider a two-stage supply chain comprising two retailers and a single supplier. Each retailer receives a signal of the consumer demand, and bids for the capacity of the supplier. The supplier sells his capacity as a bundle, and announces the winner as well as the auction price. Both retailers can get additional units in a procurement market when the auction closes, and then engage in a Cournot competition in the consumer market. We analyze the impact of the information elicited by the supplier in the early stage of the game: In the first-price auction, the winning bid is announced, while in the second-price auction, the losing bid is revealed. As a consequence of the different information revealed under the two auction formats, the retailers’ expected payoffs get affected. We characterize sufficient conditions for the existence of equilibrium behavior, derive the equilibrium bidding functions under both firstand second-price auctions, and prove that they are lower than the corresponding ones for a single shot auction with no resale. Our computational experiments with uniform signals show that both the supplier and retailers are better off by running a second-price auction. We also prove that consumers benefit if retailers have very different signals on the total demand. These results suggest that traditional auctions may have a significant impact in the context of a supply chain because of the information asymmetry introduced by announcing their results.