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Procurement when price and quality matter

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  • John Asker
  • Estelle Cantillon

Abstract

A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost and marginal cost of providing quality). We characterize the buyer's optimal buying mechanism. We then use the optimal mechanism as a theoretical and numerical benchmark to study simpler buying procedures such as scoring auctions and bargaining. Scoring auctions can extract a significant proportion of the buyer's strategic surplus (the difference between the expected utility from the optimal mechanism and the efficient auction). Bargaining does less well and often does worse than the efficient auction. Copyright (c) 2010, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 41 (2010)
Issue (Month): 1 ()
Pages: 1-34

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Handle: RePEc:bla:randje:v:41:y:2010:i:1:p:1-34

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References

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  1. Taylor, Curtis R, 1993. "Delivery-Contingent Contracts for Research," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 9(1), pages 188-203, April.
  2. Fernando Branco, 1997. "The Design of Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 63-81, Spring.
  3. John Asker & Estelle Cantillon, 2008. "Properties of Scoring Auctions," ULB Institutional Repository 2013/172674, ULB -- Universite Libre de Bruxelles.
  4. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 921-37, October.
  5. Wang, Gyu Ho, 1998. "Bargaining over a Menu of Wage Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(2), pages 295-305, April.
  6. Ganuza, Juan-Jose & Pechlivanos, Lambros, 2000. "Heterogeneity-promoting optimal procurement," Economics Letters, Elsevier, Elsevier, vol. 67(1), pages 105-112, April.
  7. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, Elsevier, vol. 85(2), pages 258-293, April.
  8. Yeon-Koo Che & Ian Gale, 2000. "Optimal Design of Research Contests," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1784, Econometric Society.
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  10. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 455-81, July.
  11. Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, Elsevier, vol. 4(1), pages 5-29.
  12. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
  13. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers, Stanford University, Department of Economics 99029, Stanford University, Department of Economics.
  14. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195115826, October.
  15. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
  16. Patrick Bajari & Robert McMillan & Steven Tadelis, . "Auctions versus Negotiations in Procurement: An Empirical Analysis," Working Papers, Stanford University, Department of Economics 02007, Stanford University, Department of Economics.
  17. Manelli, Alejandro M. & Vincent, Daniel R., 2007. "Multidimensional mechanism design: Revenue maximization and the multiple-good monopoly," Journal of Economic Theory, Elsevier, Elsevier, vol. 137(1), pages 153-185, November.
  18. Alejandro M. Manelli & Daniel R. Vincent, 1992. "Optimal Procurement Mechanisms," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
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  21. Border, Kim C, 1991. "Implementation of Reduced Form Auctions: A Geometric Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 1175-87, July.
  22. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 180-94, March.
  23. Asker, John & Cantillon, Estelle, 2005. "Optimal Procurement When Both Price and Quality Matter," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5276, C.E.P.R. Discussion Papers.
  24. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, Econometric Society, vol. 64(1), pages 51-75, January.
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