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Optimal Procurement When Both Price and Quality Matter

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  • Asker, John
  • Cantillon, Estelle

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 + marginal cost of providing quality). We solve for the optimal buying mechanism, i.e. the procedure that maximizes the buyer’s expected utility, and discuss its properties. Many of the properties of the optimal buying mechanism when information is one-dimensional (Laffont and Tirole, 1987; Che, 1993) no longer hold when we introduce private information about the fixed costs. We compare the performance of the optimal scheme to that of buying procedures used in practice, namely a quasilinear scoring auction and negotiation. Specifically, we characterize an upper bound to what a quasilinear scoring auction and negotiation can achieve, and compare the performance of these procedures numerically. Quasilinear scoring auctions are able to extract a good proportion of the surplus from being strategic. Negotiation does less well. In fact, our results suggest that negotiation does worse than holding a simple scoring auction where the buyer reveals his preference.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5276.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5276

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Related research

Keywords: bargaining; differentiated product; multi-attribute auction; multidimensional screening; negotiation; optimal auction; procurement; scoring auction;

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References

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  1. Hart, Oliver, 1989. "Bargaining and Strikes," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 25-43, February.
  2. Ganuza, Juan-Jose & Pechlivanos, Lambros, 2000. "Heterogeneity-promoting optimal procurement," Economics Letters, Elsevier, vol. 67(1), pages 105-112, April.
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  8. John Asker & Estelle Cantillon, 2008. "Properties of Scoring Auctions," ULB Institutional Repository 2013/172674, ULB -- Universite Libre de Bruxelles.
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  21. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
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  26. Armstrong, Mark, 1999. "Optimal Regulation with Unknown Demand and Cost Functions," Journal of Economic Theory, Elsevier, vol. 84(2), pages 196-215, February.
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Citations

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Cited by:
  1. John Asker & Estelle Cantillon, 2006. "Procurement When Price and Quality Matter," Working Papers 06-24, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Pierangelo Mori, 2008. "Design of Multidimensional Franchise Auctions by an Ignorant Principal," Working Papers - Economics wp2008_13.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  3. Gervasio Ciaccia & Nicola Doni & Fulvio Fontini, 2008. "Auctioning Wind Power Sites when Environmental Quality Matters," "Marco Fanno" Working Papers 0081, Dipartimento di Scienze Economiche "Marco Fanno".
  4. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.

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