A Research Forum for Technology Commercialization and Economic Logistics

The model of free competitive market remains a cornerstone in economic analysis. And yet, its relevance in the modern economy has shrunk as fewer and fewer goods satisfy the classical assumptions that the good traded be homogeneous and that sellers and buyers alike can be viewed as price takers. In some recent work, G.L. Thompson and S. Thore propose an alternative market paradigm that better captures the realities of the marketing of heterogeneous goods sold under proprietary brand names: the mathematical format of a sealed bid auction.

Even if no formal auction is conducted, it is suggested that the market formation may be described as if such an auction had taken place. Each buyer is assumed to behave as if a full range of bid prices for all brands were submitted to an auctioneer. Indirectly, those bid prices would reflect the subjective estimation of each buyer of the qualities and attractiveness of a brand.

Abstract:

A primary commodity such as wheat, rice, coffee, oil, etc., is shipped from m locations where it was grown or mined to n manufacturers. Each manufacturer processes, packages, advertises, and distributes the commodity under a consumer product brand name. The resulting heterogeneous good is sold at a sealed bid auction, in competition with the other manufacturers of the consumer product, to k final customers. The problem to be considered in this paper is to find a way of determining prices for the goods produced and the physical exchanges between seller and buyer which satisfy flow conditions and which take into account the evaluations of the goods by both sellers and buyers.

The first model for doing this is given in Section 1 which combines the idea of a sealed bid auction due to Shapley, Shubik and Thompson, with a conventional transportation system. The sealed bid auction is used to determine the exchange prices, and the transportation system is used to calculate the production and transportation costs. It is suggested that the resulting model type can also be applied in a wide range of problems that arise in the marketing of goods sold under brand names (i.e., heterogeneous goods) regardless of whether they are actually exchanged at formal auctions

We compare in Section 6 our model with a a transshipment game recently proposed by Dubey and Shapley.. They considered a number of oligopolists engaged in transshipping and trading goods. The oligopolists set prices in order to maximize profits. In our model, by contrast, the goods are truly heterogeneous and prices are determined by an auction process.

In Section 7 we extend the model to one in which the wholesalers are permitted to make positive profits. We show how to calculate the values of coalitions of the various players in the model.