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Decentralized Mechanism Design for Supply Chain Organizations Using an Auction Market

Management Science Department, University of Washington Business School, Seattle, Washington 98195
Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269
Center for Research in Electronic Commerce, Department of Management Science and Information Systems, University of Texas at Austin, Austin, Texas 78712
mfan{at}u.washington.edu
stallaert{at}sba.uconn.edu
abw{at}uts.cc.utexas.edu

Traditional development of large-scale information systems is based on centralized information processing and decision making. With increasing competition, shorter product life-cycle, and growing uncertainties in the marketplace, centralized systems are inadequate in processing information that grows at an explosive rate and are unable to make quick responses to real-world situations. Introducing a decentralized information system in an organization is a challenging task. It is often intertwined with other organizational processes. The goal of this research is to outline a new approach in developing a supply chain information system with a decentralized decision making process. Particularly, we study the incentive structure in the decentralized organization and design a market-based coordination system that is incentive aligned, i.e., it gives the participants the incentives to act in a manner that is beneficial to the overall system. We also prove that the system monotonically improves the overall organizational performance and is goal congruent.

Key Words: decentralized information system; coordination mechanism; incentive; auction; complementarity; supply chain
History: This paper was received on May 1, 2000.

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