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Procurement Auctions for Differentiated Goods

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  • James T. Swarthout
  • Jason Shachat

Abstract

We consider two mechanisms to procure differentiated goods: a request for quote and an English auction with bidding credits. In the request for quote, each seller submits 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 English 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 request for quote is socially efficient but the English auction with bidding credits is not. The optimal bidding credit assignment under compensates 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 experiments, the request for quote is less efficient than the English auctions with bidding credits. Moreover, both the buyer and seller receive more surplus in the English auction with bidding credits

Suggested Citation

  • James T. Swarthout & Jason Shachat, 2004. "Procurement Auctions for Differentiated Goods," Econometric Society 2004 Far Eastern Meetings 629, Econometric Society.
    • Handle: RePEc:ecm:feam04:629
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    References listed on IDEAS

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    Cited by:

    1. Brosig, Jeannette & Heinrich, Timo, 2011. "Reputation and Mechanism Choice in Procurement Auctions – An Experiment," Ruhr Economic Papers 254, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Jason Shachat & Lijia Wei, 2012. "Procuring Commodities: First-Price Sealed-Bid or English Auctions?," Marketing Science, INFORMS, vol. 31(2), pages 317-333, March.
    3. Isaac, R. Mark & Salmon, Timothy C. & Zillante, Arthur, 2007. "A theory of jump bidding in ascending auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 144-164, January.
    4. Brosig-Koch, Jeannette & Heinrich, Timo & Sterner, Martin, 2023. "Bilateral communication in procurement auctions," MPRA Paper 117612, University Library of Munich, Germany.
    5. Jeanette Brosig & Timo Heinrich, 2011. "Reputation and Mechanism Choice in Procurement Auctions – An Experiment," Ruhr Economic Papers 0254, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    6. Nicola Doni, 2007. "A Comparison of Alternative Procedures for the Selection of the Private Partner in PPP Projects," Working Papers - Economics wp2007_10, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    7. Brosig-Koch, Jeannette & Heinrich, Timo, 2018. "The role of communication content and reputation in the choice of transaction partners," Games and Economic Behavior, Elsevier, vol. 112(C), pages 49-66.
    8. Haoran He & Yefeng Chen, 2021. "Auction mechanisms for allocating subsidies for carbon emissions reduction: an experimental investigation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 57(2), pages 387-430, August.
    9. Charles J. Thomas, 2014. "How the Nature of Product Differentiation Affects Procurement Competition," Southern Economic Journal, John Wiley & Sons, vol. 81(2), pages 323-344, October.
    10. Heinrich, Timo & Brosig-Koch, Jeannette, 2015. "Promises and Social Distance in Buyer-Determined Procurement Auctions," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112892, Verein für Socialpolitik / German Economic Association.
    11. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
    12. Charles J. Thomas, 2019. "A New Perspective on Entry in Horizontal Merger Analysis," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 459-491, November.
    13. Gediminas Adomavicius & Shawn P. Curley & Alok Gupta & Pallab Sanyal, 2020. "How Decision Complexity Affects Outcomes in Combinatorial Auctions," Production and Operations Management, Production and Operations Management Society, vol. 29(11), pages 2579-2600, November.
    14. Vlad Mares & Jeroen Swinkels, 2014. "Comparing first and second price auctions with asymmetric bidders," International Journal of Game Theory, Springer;Game Theory Society, vol. 43(3), pages 487-514, August.
    15. Mark Isaac & Svetlana Pevnitskaya & Tim C. Salmon, 2008. "Individual Behavior In Auctions with Price Proportional Benefits," Working Papers wp2008_07_01, Department of Economics, Florida State University.
    16. Manas Ranjan Pani & Amit Agrahari & S. K. De & G. Sahoo, 2011. "Literature Review and Research Issues in e-Procurement," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 36(3), pages 225-246, August.
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    18. Mares, Vlad & Swinkels, Jeroen M., 2014. "On the analysis of asymmetric first price auctions," Journal of Economic Theory, Elsevier, vol. 152(C), pages 1-40.
    19. L. Robin Keller, 2011. "From the Editor ---Multiattribute and Intertemporal Preferences, Probability, and Stochastic Processes: Models and Assessment," Decision Analysis, INFORMS, vol. 8(3), pages 165-169, September.
    20. repec:zbw:rwirep:0254 is not listed on IDEAS
    21. Rakesh K. Sarin, 2013. "From the Editor —Optimal Betting, Reducing Unnecessary Mammography in Breast Cancer Diagnosis, Product Line Design, and Value of Information," Decision Analysis, INFORMS, vol. 10(3), pages 187-188, September.
    22. Chen, Songlin & Tseng, Mitchell M., 2010. "A Negotiation-Credit-Auction mechanism for procuring customized products," International Journal of Production Economics, Elsevier, vol. 127(1), pages 203-210, September.
    23. Robert F. Bordley & Elena Katok & L. Robin Keller, 2010. "Honoring Michael H. Rothkopf's Legacy of Rigor and Relevance in Auction Theory: From the Editors," Decision Analysis, INFORMS, vol. 7(1), pages 1-4, March.

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    More about this item

    Keywords

    Auctions; Product Differentiation; Experiment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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