Multiattribute Procurement Auctions: Efficiency and Social Welfare in Theory and Practice

Abstract

To cite this article: Gregory E. Kersten (2014) Multiattribute Procurement Auctions: Efficiency and Social Welfare in Theory and Practice. Decision Analysis 11(4):215-232. http://dx.O ne of the standard assumptions in auction theory is that preferences can be represented with quasilinear utility. This assumption is of particular significance in reverse auctions, which are used in procurement. This paper presents an analysis of quasilinear utilities and their implications. Building on observations of scholars in economics and decision sciences, who note that quasilinear preferences may be rare in practice, the paper shows that in the procurement of goods and services, price is often interrelated with costs. When preferences can be represented with convex or concave utilities, the alternatives in which the buyer's surplus is maximized are different from those that maximize social welfare. The result is that reverse auctions may cause a significant loss of social welfare, which is of particular significance for public organizations. The analysis of concave efficient frontiers in the utility space shows that it is possible to determine deals that yield greater social welfare than the winning bids. If the winning seller is willing to share the increase in utility with the buyer who faces a loss, then these alternatives can produce, for both the buyer and the seller, utility values that are higher than the utility values produced by the winning bid.

The role of transparency in procurement: Revealed versus concealed scoring rules in sealed bid A + B auctions

“…In addition, it is not necessarily true that a linear rule like S ( p , q ) is a correct translation of a buyer's preferences (Kersten, 2014). However, the linear rule is a reasonable assumption in practice.…”

On Winners and Losers in Procurement Auctions

“…This may be difficult to accept when the auction is not over goods produced earlier (in which case their costs are fixed) but over goods that are produced only after the auction successfully concludes. Other limitations include such requirements as: (1) the preferential order of attribute values has to be opposite for the bid-taker and the bid-makers; there may not be constraints which bind efficient solutions; and (3) price has to be either a single attribute or a sum of price attributes with exactly the same weights for the bid-taker and the bid-makers [29].…”