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The performance of reverse auctions versus request for quotes when procuring goods with quality differences

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  • J. Todd Swarthout
  • Jason Shachat

Abstract

The use of dynamic auctions is a major component in many enterprises' e-procurement initiatives. In the case where suppliers offer goods and services of inherently different quality the traditional mechanism has been the request for quote. In a request for quote, suppliers submit a sealed bid and the fixed quality of their offering and then the buyer selects the seller who offers the greatest difference between quality and price. The winning seller receives a price equal to his submitted bid. The reverse auction has immerged as the most commonly adopted dynamic auction for this setting. In a reverse auction, suppliers first submit the qualities of their goods and then the suppliers participate in an auction with the same message space as an open outcry English auction (descending because this is a procurement auction.) However, the auction is only used to set each suppliers price. The last price a supplier submits in the auction becomes their actual submitted price. After, the auction the buyer selects the winning seller who offers the greatest difference between quality and actual submitted price. We provide a game theoretic analysis of both mechanisms. We also provide extensive experimental evaluation of the two mechanisms as well

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 255.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:255

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Keywords: Reverse Auction; Request for Quote; procurement;

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  1. Jacob K. Goeree & Theo Offerman, 2000. "Efficiency in Auctions with Private and Common Values: An Experimental Study," Tinbergen Institute Discussion Papers 00-045/1, Tinbergen Institute.
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  7. Yeon-Koo Che & Ian Gale, 2003. "Optimal Design of Research Contests," American Economic Review, American Economic Association, vol. 93(3), pages 646-671, June.
  8. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
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  11. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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