Decentralized Supply Chain Formation: A Market Protocol and Competitive
  Equilibrium Analysis
  Supply chain formation is the process of determining the structure and terms
of exchange relationships to enable a multilevel, multiagent production
activity. We present a simple model of supply chains, highlighting two
characteristic features: hierarchical subtask decomposition, and resource
contention. To decentralize the formation process, we introduce a market price
system over the resources produced along the chain. In a competitive
equilibrium for this system, agents choose locally optimal allocations with
respect to prices, and outcomes are optimal overall. To determine prices, we
define a market protocol based on distributed, progressive auctions, and
myopic, non-strategic agent bidding policies. In the presence of resource
contention, this protocol produces better solutions than the greedy protocols
common in the artificial intelligence and multiagent systems literature. The
protocol often converges to high-value supply chains, and when competitive
equilibria exist, typically to approximate competitive equilibria. However,
complementarities in agent production technologies can cause the protocol to
wastefully allocate inputs to agents that do not produce their outputs. A
subsequent decommitment phase recovers a significant fraction of the lost
surplus.
