PAPER REVIEW

I read the revision with great interest. It claims two contributions: characterizing the optimal dominant mechanism, and proposing a hybrid algorithm. I don’t find either claim compelling.

First, the paper has little intellect content.  Essentially, it applies a well-known economic result straightforward to the assembly context. Its core, the characterization of the optimal dominant mechanism, is a textbook result in economics. For example, see chapter 7 in \cite{borgers2015introduction}.  The only part new is the balancing ordering property. But once we see that the final production quantity of assembly  is $\min(q_1,\dots, q_n)$, the balancing ordering comes immediately.

It is truly that \cite{fang2014optimal}, though dealing with the same problem, did not have the balance ordering property. But that is because \cite{fang2014optimal} make realistic assumptions on contracts: they depend only on a specific supplier, not others. This assumption is consistent with the business reality: most contracts are between \emph{two} trading parties. For execution, their terms must be verifiable. Allowing the contract depending only on the type of contracting supplier is precisely to respect this reality.

In contrast, this paper allows each contract to depending on the private information of \emph{all} other suppliers, \emph{unverifiable to the current supplier}. Given the unverifiablity and the self-interested nature of all players, why would the supplier trust the assembler not to lie about others’ types? This is very {troubling}: the dependence on all suppliers make sense in the regulatory context (where the core result comes from) \cite{salanie2000microeconomics}, but it makes no sense in private sectors with self-interested firms. In fact, I would love to see a real example of such grand contract in action.

Second, the hybrid algorithm is straightforward. It simply truncates the computation by virtual cost ranking. I also don’t find computation study of much value. (1) The demand uncertainty  is to change the curvature of the profit function, and hence the newsvendor solution \citep{cachon2008matching}. This is well-known in OM. (2) The result that the optimal dominant mechanism outperforms Fang’s mechanism is the direct consequence of removing a constraint from Fang’s model. True, such a simple algorithm can be efficient. The real question is, what is its intellect contribution?

Third, the exposition can be much improved. Overall, the paper reads more like a homework exercise than a scholar paper. The notions of virtual cost and information rent, the property of no distortion to low cost type, and the relaxation method, these are all standard for a mature reader; see \cite{wolfstetter1999topics}, \cite{salanie2005economics}, \citet{laffont2001theory}, and  \citet{bolton2005contract}. So I don’t see the need for repeating these known results. Relabeling them is not a contribution.

Also, the discussion of supplier section in \S4.2 is superficial and self-defeating. If the assembler can use the second-price auction to make the suppliers to reveal their prices, and there is a one-to-one mapping between bid price and the true cost, then the auction is sufficient for screening the cost. This eliminates the need for offering another single, grand contract to all suppliers.

The bottom line is, what are genuinely new? Having read the paper in detail, I fail to find a compelling result for publication.

2016-10-05 09.42.17

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PAPER REVIEW

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