Analysis of capacity and cost heterogeneity in a vendor base

Internet based marketplaces have enabled industrial buyers to locate suppliers from geographically diverse locations. This has resulted in increased variations in certain supplier parameters such as capacity and cost among the participating suppliers. In this paper we consider two supplier parameters that can affect the price the buyer pays and the number of suppliers that the buyer will select for award of contract. These attributes are capacity and production cost. We show how the buyer will determine the optimum number of suppliers using a reverse auction mechanism when she does not have perfect knowledge of the suppliers´ parameters.