Procurement Auctions for Differentiated Goods

Abstract

We consider two mechanisms to procure differentiated goods: a sealed-bid buyer-determined auction and a dynamic-bid price-based auction with bidding credits. The sealed-bid buyer-determined auction is analogous to the “request for quote” procedure commonly used by procurement agencies, and has each seller submit a price and the inherent quality of his good. Then the buyer selects the seller who offers the greatest difference in quality and price. In the dynamic-bid price-based auction with bidding credits, the buyer assigns a bidding credit to each seller conditional upon the quality of the seller's good. Then the sellers compete in an English auction, with the winner receiving the auction price and his bidding credit. Game-theoretic models predict the sealed-bid buyer-determined auction is socially efficient but the dynamic-bid price-based auction with bidding credits is not. The optimal bidding credit assignment undercompensates for quality advantages, creating a market distortion in which the buyer captures surplus at the expense of the seller's profit and social efficiency. In our experiment, the sealed-bid buyer-determined auction is less efficient than the dynamic-bid price-based auction with bidding credits. Moreover, both the buyer and seller receive more surplus in the dynamic-bid price-based auction with bidding credits.

Procuring Commodities: First Price Sealed Bid or English Auction?

“…The performance of the buyer determined winner auction versus the FPA in these setting is studied in Haruvy and Katok (2008), and they find the FPA is better if suppliers have accurate and precise information regarding the quality of other sellers. On the other hand, Shachat and Swarthout (2010), find that an EA with buyer assigned bidding credits can provide better outcomes than the FPA for both suppliers and sellers. There is also a large and promising literature on successful reverse auction examples where the quality is determined within the reverse auction, for example Chen-Ritzo et al (2005) and Parkes and Kalagnanam (2005).…”

Reputation and Mechanism Choice in Procurement Auctions - An Experiment

“…They confirm their theoretical findings in an experiment. Shachat & Swarthout (2010) calculate the equilibrium predictions for the sealed-bid buyer-determined auction and for a dynamic price-based auction with bidding credits. They show theoretically that the buyer surplus is higher in the latter auction format while the former is socially efficient.…”

Leveraging a Social Network of Trust for Promoting Honesty in E-Marketplaces

“…We discuss our mechanism in the context of the Request For Quote (RFQ) system [4]. Building on the incentive mechanism outlined in [2], we consider a scenario where a buyer b wants to buy a product p. The buyer specifies its evaluation criteria for a set of non-price features {f 1 , f 2 , ..., f n }, as well as a set of weights {w 1 , w 2 , ..., w n } that correspond to each non-price feature.…”

“…The RFQ auction then becomes a first-price sealed auction where a bidder's bids are not seen by others and the bidder with the highest bid (surplus offer) wins the auction. As argued in [4], a symmetric Bayes-Nash equilibrium surplus offer function can be derived as follows:…”

“…4 We suggest the inclusion of a discounting factor to allow sellers to learn over time the likelihood of receiving their expected future gain. The proofs that follow do not depend on its inclusion.…”