Truthful multi-unit transportation procurement auctions for logistics e-marketplaces George Q. Huang, Su Xiu Xu ⇑ Department of Industrial and Manufacturing Systems Engineering, The University of Hong Kong, Hong Kong, China article info Article history: Received 17 May 2012 Received in revised form 8 October 2012 Accepted 8 October 2012 Keywords: Mechanism design Auctions Transportation service procurement Incentive compatibility abstract This paper is among the first contributions that incorporate bilateral bidding into auction mechanism design for multi-unit transportation procurement in logistics e-marketplaces. Proposed mechanisms ensure incentive compatibility, individual rationality, budget bal- ance and asymptotical efficiency. We first consider one-sided VCG (Vickrey–Clarke– Groves) combinatorial auctions for a complex transportation marketplace with multiple lanes, realizing the maximal social welfare. We then design three alternative multi-unit trade reduction (MTR) mechanisms for the bilateral exchange transportation marketplace where all the lanes are partitioned into distinct markets. Compared to the base MTR mech- anism, more buyers/shippers win the ‘‘tickets’’ for competing in the final trade in the MTR- BA (buyer augment) mechanism; likewise, more sellers/carriers win these tickets in the MTR-SA (seller augment) mechanism. Under the buyer and seller augment mechanisms, both shippers’ and carriers’ expected utilities are higher than those in the base MTR mech- anism. Numerical study further shows that MTR-BA and MTR-SA mechanisms lead to higher expected utilities for shippers and carriers respectively than social welfare maximi- zation. However, the base MTR mechanism provides a higher payoff to the market broker than MTR-BA and MTR-SA mechanisms. Finally, we propose a randomized mechanism that integrates one-sided VCG mechanisms and MTR mechanisms. As a result, this randomized mechanism is practical in both the one-sided and bilateral exchange transportation mar- ketplaces, even with the less-than-truckload constraint. Ó 2012 Elsevier Ltd. All rights reserved. 1. Introduction Transportation service procurement (TSP) is the problem of determining transportation and exchange relationships across a transportation market, which consists of shippers, carriers and a third-party exchange service provider. The shippers (typically large manufacturers or retailers) provide logistics jobs to get their components or goods transported between their business partners. The transportation service of a carrier (e.g., a trucking company) can be bought at the prevailing price in the market, or alternatively through a procurement contract for a specified time horizon with negotiated rates and service level agreements. This kind of contract is commonly sought through a competitive request for proposal (RFP). This contract ensures the transportation service provisions between specific origin–destination pairs (called lanes) (Song and Regan, 2005; Lee et al., 2007). The third-party exchange service provider is actually a market broker between shippers and carriers. The third-party exchange service is delivered through a technology platform (e.g., spot market, e-marketplace) to facilitate the trading between shippers and carriers. This service platform allows shippers and carriers to share their needs and capacities. Usually the business relationships in a transportation market are established through long-term contracts (Sheffi, 2004). 0191-2615/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.trb.2012.10.002 ⇑ Corresponding author. E-mail address: xusuxiu@gmail.com (S.X. Xu). Transportation Research Part B 47 (2013) 127–148 Contents lists available at SciVerse ScienceDirect Transportation Research Part B journal homepage: www.elsevier.com/locate/trb