Research on Contract Procurement Pricing Mechanisms and Monitoring Strategies of Government-Enterprise Cooperation for Jointly Reserving Emergency Materials


Student thesis: Doctoral Thesis

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Awarding Institution
Award date16 Aug 2019


Emergency materials demand in the case of sudden disasters face huge uncertainty of explosive growth. In order to timely meet the affected people's needs, government authorities have to depend on enterprises. Given the fact that mandatory acquisition is not only unable to ensure the quantity of available materials, but also difficult to account for and control costs, government begins to establish contract cooperation with enterprises. However, for fixed-shelf-life materials, such as packaged food, bottled water and medicines, uncertainties in demand quantity and timing and immediate availability increase the government's difficulty to choose contract form and to make procurement pricing decisions. In addition, in order to ensure the reserves availability, government should inspect the quantity and quality of the emergency materials stored by cooperative enterprises. However, compared with finding insufficient quantity, government's costs to find quality problem is much higher. Unavailability to fully identify and control enterprises' rotation strategy and motivation also increases government's monitoring inefficiency and hidden dangers to the timely supply of emergency materials.

By reviewing research on emergency material reserves, we find that existing studies have not discussed government's procurement pricing under quantity flexibility contract, impacts of enterprises' urgent production and of reserve rotation on government's procurement pricing, and government's monitoring strategies to induce enterprises' timely rotation. To tackle these problems, this thesis first studies government's procurement pricing decisions from the perspective of establishing government-enterprise emergency material reserve contract cooperation. Then, based on the enterprise's decision and motivation of rotation under long-term reserve cooperation, this thesis further analyses government's monitoring strategies from the perspective of ensuring enterprises' timely rotation. Strategies with wide practical application value for government-enterprise contract cooperation to increase the reserves quantity and ensure the quality of the reserves held by cooperative enterprises are proposed accordingly. Main innovative work and findings of this thesis are as follows.

(1) Studying government's procurement pricing decisions of single-period storage cooperation within quantity flexibility contract framework. Given the highest expected fill rate, buyer preference and the need of high flexibility in emergency material procurement, this study constructs a single-period government-enterprise reserve cooperation under quantity flexibility contract. Government's optimal procurement pricing when enterprise can only provide physical reserves and can also adopt urgent production are proposed. Then, compared with centralized and decentralized supply chains, conditions for contract cooperation and influence of procurement pricing on cooperation efficiency are generated. Numerical analyses and sensitivity analyses further validate the advantages of this contract cooperation in increasing reserves quantity and reducing government costs. In theory, existing government-enterprise cooperation under quantity flexibility contract is mostly based on foreign emergency management problem, not applicable to the government-dominant situation, i.e., government's procurement pricing problem. Research on government's procurement pricing impacted by enterprise's urgent production capacity is also a meaningful supplement. In application, this study suggests government should first select enterprises with urgent production capacity, and then make procurement pricing decision conditional on the capacity level to effectively guarantee the material supply and reduce costs.

(2) Studying government's procurement pricing decisions of multi-period storage cooperation within quantity commitment contract framework. Considering reserve rotation can reduce materials value losses and maintain reserves availability, this study introduces rotation into the quantity flexibility contract constructed in study (1), proposing a multi-period reserve cooperation under quantity commitment contract. Given enterprise's optimal decision on rotation frequency, factors and conditions affecting its rotation frequency and motivation are put forward. Then, on the basis of timely rotation, government's optimal rotation frequency, procurement pricing and other decisions are obtained. Numerical analyses and sensitivity analyses show that reserve rotation can effectively reduce government's procurement pricing and costs. Impacts of some parameters on contract cooperation efficiency are also proposed. In theory, this study not only makes up for the shortage of government's procurement pricing impacted by reserves rotation, but also puts forward a model and method to distinguish enterprise's rotation decision and motivation from cost-benefit perspective. In application, this study suggests that government should select enterprises with large market share and low operating cost to participate in long-term reserve cooperation. Government should also accurately evaluate objective factors, including enterprise's costs, material shelf-life and market conditions, to identify enterprise's rotation motivation, laying foundation to formulate efficient monitoring strategies during cooperation.

(3) Studying government's monitoring strategies to induce enterprise's timely and compliant rotation in long-term storage cooperation. After study (2) identifies the key factors and conditions affecting enterprise's rotation motivation, this study constructs a repeated government-enterprise game model. That is, given the interactive relation between enterprise's action and reserves quality transition, as well as government's information disadvantage caused by costly monitoring, the repeated monitoring game model is designed based on the definition and generation condition of (Restricted) Experience Based Equilibrium. Then, magnitudes of government's (enterprise's) economic losses when government does not timely find the poor-quality reserves are used to represent government's monitoring aim of guaranteeing reserves real-time availability (rotation motivation). Rationality and validity of the game model and solution method are well verified given the highly matching degree between numerical results and existing research, as well as actual observations. In theory, existing research on cooperative enterprise's moral hazard only focuses on quantity issues, while this study provides a generally applicable game model and solution method for reserve quality assurance problem. In application, this study suggests that in long-term reserve cooperation, government should adopt monitoring strategies on Restricted Experience Based Equilibrium to guide enterprise's timely rotation, reduce monitoring costs and improve monitoring efficiency. It is also better for the government to make monitoring strategies based on multi-period historical information.

(4) Studying government's monitoring strategies to induce multiple enterprises' timely rotation, with impacts of monitoring capacity. Based on studies (2) and (3), we further consider each player's information advantage and government's monitoring capacity constraint when multiple independent enterprises are monitored. A repeated monitoring game model with multiple agents and principal's action combination selection constraint is constructed. In the algorithm, negative infinity of the initial expected discounted values of the government's action combination that exceeds monitoring capacity, as well as relaxation of testing indices, are utilized to characterize such a capacity constraint. By comparing enterprises' rotation actions and government's monitoring strategies with and without this constraint, its impacts on government's monitoring strategies are proposed. In theory, this study provides a generally applicable game framework and solution method for government's monitoring on emergency material reserves held by multiple enterprises, enriching the research on moral hazard problems related to reserves quality. In application, this study suggests that improving government's monitoring capacity is of great significance to the sustainable availability of emergency material reserves. While, when it is impossible in a short term, government can show "virtual capability" by exerting prolonged high monitoring efforts toward some enterprises, alleviating the monitoring inefficiency caused by the capacity constraint.

    Research areas

  • Emergency materials reserve, Government-enterprise cooperation, Contract procurement, Pricing mechanisms, Monitoring strategies