Combinatorial Market Processes for Multilateral Coordination

Management processes rely on in-depth planning functions that need to coordinate interactions among multiple entities and tasks. Multilateral coordination is key to both internal control and market-based efforts. Combinatorial processes facilitate multilateral coordination, which motivates examining their use in logistics and procurement for the U.S. Department of Defense (DoD), and other applications.

A combinatorial market determines transactions by finding mutually acceptable overlaps among pattern orders submitted by market participants. Pattern orders allow participants to express their acceptable tradeoffs among the numerous separate pieces that would fulfill their goals. Networks of transactions result in which the individual exchanges among parties aggregate to fulfill the interests of all parties. Conventional item-by-item markets require that orders disaggregate patterns. The resulting trades are independent of tradeoff concerns, and can be much inferior to combinatorial market trades.

Markets provide a means to coordinate self-interest. Markets are superior to command and control techniques of coordination when self-interested parties can choose whether to participate or not in some endeavor. Markets also offer superior coordination even when self-interested parties are compelled to participate yet may condition such participation to their benefit based on asymmetric information. The ability of markets to aggregate information and synthesize meaningful indications of system-wide trends (e.g., prices) from diverse participants, each of which holds partial information, adds to the valuable roles markets could play in DoD undertakings. But all of these uses and potential benefits come with a caveat - there are many types of markets and for a market to provide best value (or, indeed, any value at all) to those who use it, the market must be designed to
service the intended use.

Conventional markets separate commerce into buying and selling activity for individual goods or services. Parties that execute their multi-item and multi-period plans through such markets disassemble those plans into the item-by-item pieces required by the markets. When market liquidity is insufficient for the piecemeal execution of a plan, parties choose to negotiate structured deals with one or more partners. Structured deals subject commerce to the maneuvers that naturally accompany asymmetric information, slow down commerce, tend to fragment commerce by restricting deals to established partners, and are too cumbersome to be efficiently modified over the term of the deal. But notice that the insufficient market liquidity that motivates structured deals is defined relative to the market used, an endogenous restriction on commerce that can be ameliorated by designing a better market.