Procurement Strategy Selection and Mechanism Design for Technology Upgrade Products

Abstract

To increase their competitiveness, firms continue to upgrade their products and to buy technology upgrade components. While firms generally know the value of technology upgrade products (components), they do not know when the upgrade solution can be produced on a massive scale, who can produce it, and what the unit production cost is when they make their purchase decisions. To obtain the upgrade solution information and to reduce their purchase costs, some firms adopt the strategic supplier with bargaining mechanism, while other firms adopt the reverse auction with incentive mechanism. Recently, some firms (e.g., China National Petroleum Corporation) have adopted an innovative mechanism: they establish strategic partnerships with advanced suppliers and promise a proportion of the order to incentivize them to reveal the information on time. Meanwhile, they also adopt the reverse auction to determine the winning supplier and the purchase price for the remaining order to reduce purchase costs. Motivated by these firms’ practices, we propose a new procurement mechanism for technology upgrade products: the strategic auction mechanism. We analyze the optimal promised proportion of the order, the suppliers’ equilibrium policy, and the buyer’s equilibrium profit under this mechanism. In addition, we compare the performance of these three mechanisms and identify their application conditions.