The Core and Shapley Value Analysis for Cooperative Formation of Procurement Networks

Abstract

Formation of high value procurement networks involves a bottom-up assembly of complex production, assembly, and exchange relationships through supplier selection and contracting decisions, where suppliers are intelligent and rational agents who act strategically. In this paper we address the problem of forming procurement networks for items with value adding stages that are linearly arranged. We model the problem of procurement network formation (PNF)for multiple units of a single item as a cooperative game where agents cooperate to form a surplus maximizing procurement network and then share the surplus in a stable and fair manner. We first investigate the stability of such networks by examining the conditions under which the core of the game is nonempty. We then present a protocol, based on the extensive form game realization of the core, for forming such networks so that the resulting network is stable. We also mention a key result when the Shapley value is applied as a solution concept.