Reputation and Mechanism Choice in Procurement Auctions: An Experiment

We experimentally study the role of reputation in procurement using two common mechanisms: price‐based and buyer‐determined auctions. While buyers are bound to buy from the lowest bidder in price‐based auctions, they can choose between bidders in buyer‐determined auctions. Only the latter buyers can consider the reputation of bidders. We find that bidders supply higher quality in buyer‐determined auctions leading to higher market efficiencies in these auctions. Accordingly, buyers prefer the buyer‐determined auction over the price‐based auction, while only half of the bidders do so. A more detailed analysis of buyers' and bidders' behavior and profits provides insights into their mechanism choice.     

Design of Auction Parameters to Reduce the Effect of Collusion

Government departments are increasingly turning to auctions to procure goods and services. Collusion among bidders, however, reduces competition and raises winning bid prices. Since conventional collusion control measures based on the redesign of auction mechanisms are less effective in government procurement auctions, there is a need to devise control measures that decrease the effect of collusion. This article demonstrates how the principles of design of experiments can be applied in a system dynamics model to find the auction parameter values that substantially reduce the effect of collusion in government procurement auctions. This research makes a number of contributions. First, it develops a feedback‐based dynamic mechanism of collusion in government procurement auctions. The mechanism proposes the winning bid price as being determined not by the total number of bidders but by the number of independent bidders. It defines each cartel as one independent bidder regardless of the number of bidders in the cartel. Second, the mechanism is tested by developing a system dynamics model to government auctions for procuring contracts for roadwork projects in India. Third, the principles of experimental design are applied to find the auction parameter values that ensure high bid participation and low winning price‐to‐reserve price ratios.     

ASSESSING SOCIAL COSTS OF INEFFICIENT PROCUREMENT DESIGN

This paper considers the social costs implied by inefficient allocation of contracts in a first‐price, sealed‐bid procurement auction with asymmetric bidders. We adopt a constrained (piecewise linear) strategy equilibrium concept and estimate the structural parameters of the bidders' distribution of costs. We estimate social costs defined as the predicted cost difference between the winning firm and the most efficient bidding firm. We also compare the expected procurement costs under two different auction formats. The data is collected from procurement auctions of road painting in Sweden during 1993–1999. The results indicate that the social costs of inefficient contract allocation is about 2% of total potential production cost and that an efficient second‐price auction would lower the expected procurement cost by 2.5%. (JEL: D44, H57, C15)     

Keyword Auctions,Unit‐Price Contracts,and the Role of Commitment

Motivated by the enormous growth of keyword advertising, this paper explores the design of performance‐based unit‐price contract auctions, in which bidders bid their unit prices and the winner is chosen based on both their bids and performance levels. The previous literature on unit‐price contract auctions usually considers a static case where bidders' performance levels are fixed. This paper studies a dynamic setting in which bidders with a low performance level can improve their performance at a certain cost. We examine the effect of the performance‐based allocation on overall bidder performance, auction efficiency, and the auctioneer's revenue, and derive the revenue‐maximizing and efficient policies accordingly. Moreover, the possible upgrade in bidders' performance level gives the auctioneer an incentive to modify the auction rules over time, as is confirmed by the practice of Yahoo! and Google. We thus compare the auctioneer's revenue‐maximizing policies when she is fully committed to the auction rule and when she is not, and show that the auctioneer should give less preferential treatment to low‐performance bidders when she is fully committed.     

Increasing Revenue by Decreasing Information in Procurement Auctions

We report on results of several laboratory experiments that investigate on‐line procurement auctions in which suppliers bid on price, but exogenous bidder quality affects winner determination. In procurement auctions, bidder quality may or may not be publicly known to all bidders, and the effect of this quality transparency on the auction outcome is one aspect of auction design that we examine. The second aspect of auction design that we examine is the effect of price visibility on the auction outcome, and the interaction between price visibility and quality transparency. In terms of price visibility, we consider two extreme cases: the sealed bid request for proposals (RFPs), and the open‐bid dynamic auction event. In terms of bidder quality transparency, we also consider two extreme cases: a setting in which bidder qualities are publicly known and the case in which they are private. We find that in our laboratory experiments, the RFP format is consistent in generating higher buyer surplus levels than does the open‐bid dynamic format. This advantage is independent of the quality transparency. In contrast, the open‐bid format is highly sensitive to quality transparency, generating significantly lower buyer surplus levels when the information about bidder quality is public.     

Notes and Comments the Amsterdam Auction

The Amsterdam auction has been used to sell real estate in the Dutch capital for centuries. By awarding a premium to the highest losing bidder, the Amsterdam auction favors weak bidders without having the implementation difficulties of Myerson's (1981) optimal auction. In a series of experiments, we compare the standard first‐price and English auctions, the optimal auction, and two variants of the Amsterdam auction. With strongly asymmetric bidders, the second‐price Amsterdam auction raises substantially more revenues than standard formats and only slightly less than the optimal auction.     

Split‐Award Procurement Auctions—Can Bayesian Equilibrium Strategies Predict Human Bidding Behavior in Multi‐Object Auctions?

We analyze if and when symmetric Bayes Nash equilibrium predictions can explain human bidding behavior in multi‐object auctions. We focus on two sealed‐bid split‐award auctions with ex ante split decisions as they can be regularly found in procurement practice. These auction formats are straightforward multi‐object extensions of the first‐price sealed‐bid auction. We derive the risk‐neutral symmetric Bayes Nash equilibrium strategies and find that, although the two auction mechanisms yield the same expected costs to the buyer, other aspects of the two models, including the equilibrium bidding strategies, differ significantly. The strategic considerations in these auction formats are more involved than in single‐lot first‐price sealed‐bid auctions, and it is questionable whether expected utility maximization can explain human bidding behavior in such multi‐object auctions. Therefore, we analyzed the predictive accuracy of our equilibrium strategies in the laboratory. In human subject experiments we found underbidding, which is in line with earlier experiments on single‐lot first‐price sealed‐bid auctions. To control for regret, we organize experiments against computerized bidders, who play the equilibrium strategy. In computerized experiments where bid functions are only used in a single auction, we found significant underbidding on low‐cost draws. In experiments where the bid function is reused in 100 auctions, we could also control effectively for risk aversion, and there is no significant difference of the average bidding behavior and the risk‐neutral Bayes Nash equilibrium bid function. The results suggest that strategic complexity does not serve as an explanation for underbidding in split‐award procurement auctions, but risk aversion does have a significant impact.     

Do Auction Parameters Affect Buyer Surplus in E‐Auctions for Procurement?

Although the initial euphoria about Internet‐enabled reverse auctions has given way to a cautious but widespread use of reverse auctions in business‐to‐business (B2B) procurement, there is a limited understanding of the effect of auction design parameters on buyer surplus. In this paper, we study the effect of bidding competition, information asymmetry, reserve price, bid decrement, auction duration, and bidder type on buyer surplus. We collected field data on more than 700 online procurement auctions conducted by a leading auctioneer and involving procurement items worth millions of dollars. Consistent with the predictions of auction theory, the results indicate that bidding competition, reserve price, and information sharing affect buyer surplus. Unlike previous findings in the consumer‐to‐consumer context, we find that bid decrement and auction duration have no effect in B2B procurement auctions. Our results suggest that use of the rank‐bidding format increases buyer surplus when incumbent suppliers participate in the auction. We discuss the theoretical and managerial implications of these findings for future research and for optimal design of online procurement auctions.     

Speculation in Standard Auctions with Resale

In standard auctions resale creates a role for a speculator—a bidder who is commonly known to have no use value for the good on sale. We study this issue in environments with symmetric independent private‐value bidders. For second‐price and English auctions the efficient value‐bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits. First‐price and Dutch auctions have an essentially unique equilibrium, and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders, the value distribution, and the discount factor. Speculators do not make profits in first‐price or Dutch auctions.     

An Analysis of Scoring and Buyer‐Determined Procurement Auctions

In procurement auctions, the object for sale is a contract, bidders are suppliers, and the bid taker is a buyer. The suppliers bidding for the contract are usually the current supplier (the incumbent) and a group of potential new suppliers (the entrants). As the buyer has an ongoing relationship with the incumbent, he needs to adjust the bids of the entrants to include non‐price attributes, such as the switching costs. The buyer can run a scoring auction, in which suppliers compete on the adjusted bids or scores, or, he can run a buyer‐determined auction, in which suppliers compete on the price, and the buyer adjusts a certain number of the bids with the non‐price attributes after the auction to determine the winner. Unless the incumbent has a significant cost advantage over the entrants, I find that the scoring auction yields a lower average cost for the buyer, if the non‐price attributes are available. If the non‐price attributes are difficult or expensive to obtain, the buyer could run a buyer‐determined auction adjusting only the lowest price bid.     

A Mechanism Design Approach to Ranking Asymmetric Auctions

I propose a new mechanism design approach to the problem of ranking standard auctions with two heterogeneous bidders. A key feature of the approach is that it may be possible to rank two auctions even if neither dominates the other for all combinations of types. The approach simplifies the analysis and unifies results in the existing literature. Roughly speaking, the first‐price auction is more profitable than the second‐price auction when the strong bidder's distribution is flatter and more disperse than the weak bidder's distribution. Applications include auctions with one‐sided externalities. Moreover, contrary to previous work, reserve prices are easily handled. Finally, the method can be extended to some environments with many bidders.     

Collusion in Second‐Price Auctions under Minimax Regret Criterion

Collusion in auctions, with different assumptions on distributions of bidders' private valuation, has been studied extensively over the years. With the recent development of on‐line markets, auctions are becoming an increasingly popular procurement method. The emergence of Internet marketplaces makes auction participation much easier and more convenient, since no physical presence of bidders is required. In addition, bidders in on‐line auctions can easily switch their identities. Thus, it may very well happen that the bidders in an auction have very little, if any, prior knowledge about the distributions of other bidders' valuations. We are proposing an efficient distribution of collusive profit for second‐price sealed bid auctions in such an environment. Unlike some known mechanism, which balance the budget only in expectation, our approach (which we call Random k) balances the budget ex‐post. While truth‐telling is not a dominant strategy for Random k, it is a minimax regret equilibrium.     

Ranked Items Auctions and Online Advertisement

We study auctions for a set of commonly‐ranked items where each buyer has unit demand. This setting has promising applications in areas such as keyword auctions in the search engine advertising industry, the sale of quality‐ranked raw materials, etc. An auction mechanism suitable for this setting is the simultaneous pooled auction (SPA), where each bidder simultaneously submits a single bid and is allocated an object based on the rank of his bid among all the bids. We study how to improve the seller's expected revenue by enforcing a reserve price in an SPA. We find that the use of an appropriate reserve price may significantly increase the seller's revenue, especially when the number of items for sale is relatively large compared to the number of participating bidders. One inherent problem in the SPA is that some bidders may incur ex post losses; that is, they pay more than what they value the received objects. We propose a tailored VCG mechanism that generates the same expected revenue as the SPA does, while bidders do not incur any ex post loss. We also discuss the potential applications of this research to keyword auctions.     

多部件采购外包的两阶段均衡投标策略

本文考虑一个由单个制造商和多个供应商群体组成的供应链——该制造商需要采购多个部件,对于每个部件在市场上均存在多个供应商。不同于传统的从各供应商群体分别采购各个部件,制造商考虑将所有部件的采购整体外包给某个供应商。在第一阶段,制造商使用一级价格密封投标的逆向拍卖来确定赢得整体采购合约的供应商。接下来,第一阶段投标的获胜者生产其所能供应的部件,并使用逆向拍卖向第一阶段中未获胜的其他竞标者采购其余部件。我们分析了供应商在两个阶段的均衡竞价策略,并比较了制造商在亲自逐件采购和外包整体采购两种情况下的期望采购成本。我们证明了在两种机制下制造商的总的期望采购成本相等。     

Reverse Auctions to Innovate Procurement Processes: Effects of Bid Information Presentation Design on a Supplier's Bidding Outcome

Information technologies (ITs) are being used to innovate various procurement processes. This research study focuses on the supplier‐side effects of IT design choices to conduct reverse auctions, which are increasingly used to procure a wide range of products and services. IT–enabled reverse auctions enhance supplier participation across geographical boundaries, leading to more efficient pricing. However, there are growing concerns about the adverse effects of IT–enabled reverse auctions on a supplier's performance. Supplier‐side issues are gaining prominence in the reverse auction literature and are critical for the long‐term success of reverse auctions. Therefore, we focus on suppliers’ bidding outcomes and assess how the design of an IT–enabled reverse auction facilitates the auction bidding outcomes of participating suppliers. Specifically, we examine the effects of two types of bid information presentation design—full price visibility and partial price visibility—on supplier's auction bidding outcomes, across auctions with different cost certainty and suppliers bargaining power vis‐à‐vis the buyer. The results of this study contribute new knowledge about the ways to use IT for creating effective auction designs and innovating procurement through auctions to enhance both the buyer's and suppliers’ performance. We present the detailed theoretical contributions of our study and discuss the managerial implications for designers of reverse auctions.      

First‐Price Auctions With General Information Structures: Implications for Bidding and Revenue

We explore the impact of private information in sealed‐bid first‐price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning‐bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We also report further characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from data on winning bids and for the informationally robust comparison of alternative auction mechanisms.     

Bidding under auctioneer default risk

In a financially turbulent economy, participants of a procurement auction should consider in their bids the event of default of the auctioneer, which may result to substantial damages for the winning bidder. We examine a sealed bid auction, with private cost values and interdependence among the beliefs of the bidders about the auctioneer׳s default risk. The probability of payment of the bid price by the auctioneer is estimated by each bidder. For a first and a second price auction, we derive equilibrium bidding strategies, which address the risk of default and optimally adjust the bid price, introducing a risk premium in the form of an additional mark-up. A numerical illustration of the proposed strategies is provided. The effect of auctioneer׳s risk of default on the procurement project cost is examined. Financial arrangements that may be used to relax or eliminate the effect of the risk of default, such as early payment methods, third party guarantees or insurance programs are discussed and evaluated in comparison with the approach of risk premium on bid price.     

Transparency in Buyer‐Determined Auctions: Should Quality be Private or Public?

We study buyer‐determined procurement auctions where both price and non‐price characteristics of bidders matter for being awarded a contract. Although, in scoring auctions bidders perfectly know how price and non‐price attributes determine the awarding of the contract, this remains uncertain in buyer‐determined auctions where the buyer is free to choose once all bids have been submitted. We analyze the impact of information bidders have with respect to the buyer's awarding decision. As we show theoretically whether it is in the buyer's interest to conceal the impact of non‐price characteristics depends on how important the quality aspects of the procured good are to the buyer: The more important quality aspects are, the more interesting concealment becomes. In a counterfactual analysis using data from a large European procurement platform, we analyze the reduction of non‐price information available to the bidders. Confirming our hypothesis, for auction categories where bidders’ non‐price characteristics strongly influence buyers’ decisions concealment of non‐price information leads to an increase in buyers’ surplus of up to 15% due to higher competitive pressure and lower bids. Conversely, for categories where bidders’ non‐price characteristics are of little importance concealment of non‐price information leads to a decrease in buyers’ surplus of up to 6%.     

The Effect of Timing on Jump Bidding in Ascending Auctions

We investigate the role of timing in ascending auctions under the premise that time is a valuable resource. Traditional models of the English auction ignore timing issues by assuming that the auction occurs instantaneously. However, when auctions are slow, as Internet auctions used for procurement often are, there are significant opportunity or monitoring costs to bidders, and the choice of the size of the jump bid becomes a strategic decision. We study the choice in the experimental laboratory by systematically varying the opportunity costs associated with fast bidding. When time is more valuable bidders respond by choosing larger jump bids. Surprisingly, the economic performance of the auction is not significantly affected. We develop a simple model of ascending auctions with impatient bidders that provides insights into the effect jump bids have on auction performance.     

On E‐Auctions for Procurement Operations

Electronic auctions have revolutionized procurement in the last decade. In many situations, they have replaced negotiations for supplier selection and price setting. While they have often greatly reduced transaction costs and increased competition, they have also encountered problems and resistance from suppliers resenting their intrusion on cooperative supplier/buyer relationships. In response to these issues, procurement auctions have evolved in radical new directions. Buyers use business rules to limit adverse changes. Some procurement auctions allow bidders to offer variants in the specifications of products to be supplied. Most important, some suppliers are allowing bidders to bid on packages of items, not just individual items. This tends to change procurement auctions from zero‐sum fights over supplier profit margins to win‐win searches for synergies. These changes have opened up many new research areas. Researchers are trying to improve how to deal with the computational issues involved in package auctions and to analyze the new auctions forms that are evolving. In general, equilibrium incentives are not known, and dealing with ties in package auctions is an issue. Computer scientists are analyzing the use of computerized bidding agents. Mechanisms that combine auctions with fixed buy prices or with negotiations need to be analyzed.