Optimal Procurement Mechanisms for Assembly

We consider an OEM’s contracting mechanism to procure multiple inputs from different suppliers to be assembled into its product under simultaneous and sequential contracting. We derive optimal mechanisms under both contracting scenarios, and show that they can be implemented by simple tiered-pricing contracts which are widely used in industry assembly settings. We find that optimal simultaneous and sequential procurement mechanisms for assembly are revenue-equivalent for all parties, despite them having different asymmetric information structures. All results are extended to general convex costs and concave revenues, confirming that the results capture fundamental properties of optimal procurement mechanisms for assembly.