Procurement Network Formation: A Cooperative Game Theoretic Approach

Abstract

In this chapter, we model the multiple unit single item procurement network formation problem as a surplus maximizing network flow cooperative game. Here, each edge is owned by a rational utility maximizing agent. Also, each agent has a capacity constraint on the number of units that he can process. That is, each edge can be assumed to have a capacity constraint on the flow that it can admit. The buyer has a demand for a certain number of units. The agents in the network must coordinate themselves to meet this demand. The buyer also has a specified valuation per unit of the item. The surplus which is the difference between the value generated and the minimum cost flow in the network, is to be divided among the agents that help provide the flow. We first investigate the conditions under which the core of this game is non-empty. We then construct an extensive-form game to implement the core whenever it is non-empty.