Resource Allocation Under Demand Uncertainty and Private Information

Abstract

We study the effect of multilateral private information on the efficiency of markets where capacity-constrained upstream agents supply a resource to downstream entities facing uncertain end-demands. We analyze two models: a “pooling system,” in which a single downstream principal pools a resource from multiple upstream agents; and a “distribution system,” in which one upstream principal allocates a resource across multiple downstream agents. We show that the presence of multilateral private information does not hinder efficiency in the pooling system. In contrast, in the distribution system, the quantities allocated to downstream agents can exceed, as well as fall short of, their first-best levels. These results shed light on the recently improved performance of U.S. agricultural produce market, and the observed episodes of shortages/oversupplies in flu vaccine and other seasonal markets. This paper was accepted by Manel Baucells, decision analysis.