Mechanism design for green, truthful procurement auctions

Abstract

Auction based mechanisms have become popular in industrial procurement settings. These mechanisms minimize the cost of procurement and at the same time achieve desirable properties such as truthful bidding by the suppliers. In this paper, we investigate the design of truthful procurement auctions taking into account an additional important issue namely carbon emissions. In particular, we focus on the following procurement problem: A buyer wishes to source multiple units of a homogeneous item from several competing suppliers who offer volume discount bids and who also provide emission curves that specify the cost of emissions as a function of volume of supply. We assume that emission curves are reported truthfully since that information is easily verifiable through standard sources. First we formulate the volume discount procurement auction problem with emission constraints under the assumption that the suppliers are honest (that is they report production costs truthfully). Next we describe a mechanism design formulation for green procurement with strategic suppliers. Our numerical experimentation shows that emission constraints can significantly alter sourcing decisions and affect the procurement costs dramatically. To the best of our knowledge, this is the first effort in explicitly taking into account carbon emissions in planning procurement auctions.