Supplier coalitions in on-line reverse auctions: Validity requirements and profit distribution scheme

This paper studies the formation of supplier coalitions in on-line reverse auctions. An auction mechanism with supplier coalitions is proposed, which allows suppliers to form coalitions with one another for the purpose of enhancing their profitability and providing them inventives to participate in on-line reverse auctions. Basic requirements are identified for a valid coalition mechanism, and the requirements include individual rationality, market efficiency compatibility, maintaining competition, observability and controllability, and financial balancedness. The proposed coalition mechanism is well defined and satisfies all validity requirements. The stable coalition structure under this mechanism is also studied, and it is proved that under symmetric information there exists one unique strongly stable coalition structure. The grand coalition usually does not form a strongly stable coalition structure.