- Procurement Auctions for Differentiated Goods
- Jason Shachat, J.Todd Swarthout
- Decision Analysis
- #002123 20131014 (published)
- 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.
- Keywords: procurement; auction; product differentiation; experiment
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