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

We study a supply chain where an upstream supplier auctions his inventory or capacity as a bundle. The importance of this setting is two-fold: From a practical point of view, there are several examples, specially in service industries (e.g., auctioning the capacity of a stadium to hold events, or auctioning the sponsorship of a website), where a supplier’s capacity is sold as a single piece; from a theoretical side, it highlights the information asymmetry introduced on the downstream supply chain parties when the auction result is disclosed. We formulate the problem as a two-stage supply chain comprising a single supplier and two resellers. Each reseller receives a signal of the consumer demand, and bids for the capacity of the supplier. The supplier announces the winner as well as the auction price. Both resellers can get additional units in a procurement market, 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. We characterize sufficient conditions for the existence of equilibrium behavior, derive the equilibrium bidding functions under both firstand second-price auctions, and show that they are lower than the corresponding ones for a single-shot auction without resale. Our computational experiments indicate that both the supplier and resellers are better off by running a second-price auction, and that consumers benefit if the resellers have very different signals on the total demand. Overall, our results suggest that traditional auctions may have a profound impact in the context of a supply chain because of the information disclosure in the upstream stages.