A Comparison of Buyer-Determined and Price-Based Multiattribute Mechanisms

Abstract

Reverse auctions are fast becoming the standard for many procurement activities. In the past, the majority of such auctions have been solely price based, but increasingly attributes other than price affect the auction outcome. Specifically, the buyer uses a scoring function to compare bids and the bid with the highest score wins. We investigate two mechanisms commonly used for procurement in business-to-business markets, in a setting in which buyers' welfare is affected by exogenous nonprice attributes such as the quality, service, and past relationships. Under both mechanisms, bidders bid based on price, but in the “buyer-determined” mechanism, the buyer is free to select the bid that maximizes her surplus while in the “price-based” mechanism, the buyer commits to awarding the contract to the low price bidder. We find, both in theory and in the laboratory, that the “buyer-determined” mechanism increases the buyer's welfare only as long as enough suppliers compete. If the number of suppliers is small and the correlation between cost and quality is low, the buyer is better off with the “price-based” mechanism. These findings are intended to help procurement managers make better decisions in designing procurement mechanisms for a variety of settings.bidding, procurement, reverse auctions, multiattribute auctions, behavioral game theory, experimental economics

On Winners and Losers in Procurement Auctions

“…There are also many auctions which do not result in a contract. These auctions are used to determine price and are followed by negotiations [11]. The reason for the auction-followed-by-negotiation mechanism and buyer-determined auctions is that the auction theory and the results from the experimental economics are difficult to implement in procurement [12].…”

Interorganizational Relationships and Bidding Behavior in Industrial Online Reverse Auctions

“…Academic interest in online reverse auctions is also on the rise, with growing streams of research on the benefits and risks of online reverse auctions (Mabert and Skeels 2002;Smeltzer and Carr 2003) as well as the performance implications of auction design choice which are both economic (Carter et al 2004;Engelbrecht-Wiggans et al 2007;Millet et al 2004) and relational (Jap 2003(Jap , 2007.…”

“…Additionally, bidder behaviors in these auctions might be influenced by a host of issues external to the auction such as gaining a strategic position with the buyer or accounting for its own economic concerns (Engelbrecht-Wiggans et al 2007).…”

Reputation and Mechanism Choice in Procurement Auctions - An Experiment

“…The directive of the European Union, explicitly offers the choice between two award criteria: "the lowest price only" or "the most economically advantageous", the latter allowing for a number of criteria such as "quality, price, technical merit" and so on (EU Directive 2004/18/EC, Article 53, Paragraph 1). In research on procurement auctions these two options are usually referred to as 'price-based procurement auctions' and 'buyer-determined procurement auctions' (Engelbrecht-Wiggans, Haruvy, & Katok, 2007). While buyers are bound to buy from the lowest bidder in price-based auctions, they can choose between bidders in buyer-determined auctions based on price and all other available criteria (often subsumed as quality).…”