Supporting decision in group buying based on combinatorial reverse auction

Abstract

Group buying is an important business model. Quantity based discounts provide a huge incentive to form coalitions and take advantage of lower prices without ordering more than buyers' actual demand. By forming a coalition, buyers can also improve their bargaining power and negotiate more advantageously with sellers to purchase at a lower price. One way to reduce the cost is to take into account the complementarities between items provided by the sellers. By holding a combinatorial reverse auction, the total cost to acquire the required items will be significantly reduced due to complementarities between items. We propose the concept of proxy buyer to consolidate the demands from the buyers and hold a reverse auction to acquire the goods from sellers. The problem is to determine the winners to minimize the total cost for the proxy buyer. The main results include: (1) a problem formulation for the combinatorial reverse auction problem; (2) a solution methodology based on Lagrangian relaxation and (3) analysis of numerical results based on our solution algorithms.