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Auctions for Procuring Options

Kellogg School of Management, MEDS Department, Northwestern University, Evanston, Illinois 60208
Kellogg School of Management, MEDS Department, Northwestern University, Evanston, Illinois 60208
schummer{at}kellogg.northwestern.edu
r-vohra{at}northwestern.edu

We examine the mechanism-design problem for a single buyer to procure purchase options for a homogeneous good when that buyer is required to satisfy an unknown future demand. Suppliers have two-dimensional types in the form of commitment costs and production costs. The efficient schedule of options depends on the distribution of demand. To implement an efficient outcome, we introduce a class of mechanisms which are essentially pivotal mechanisms (Vickrey-Clarke-Groves) with respect to the expected costs of the suppliers. We show that the computational task of running such mechanisms is not burdensome. Our discussion uses electricity markets as an example.

Subject classifications: Games; bidding/auctions: procuring from capacity-constrained suppliers; Programming; linear: formulating.
History: Received March 2001; revision received August 2001; accepted January 2002.

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