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A Simple Multi-attribute Yardstick Auction Without Prior Scoring

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Author Info

  • Jens Leth Hougaard

    ()
    (Institute of Food and Resource Economics, University of Copenhagen)

  • Kurt Nielsen

    ()
    (Institute of Food and Resource Economics, University of Copenhagen)

  • Athanasios Papakonstantinou

    (Department of Economics, Copenhagen Business School)

Abstract

We analyze a simple multi-attribute procurement auction that uses yardstick competition to settle prices. Upon receiving the submitted bids the auctioneer computes the yardstick prices (bids) by a linear weighting of the other participants’ bids. The auction simplifies the procurement process by reducing the principal’s articulation of preferences to simply choosing the most preferred offer as if it was a market with posted prices. The auction is not incentive compatible. For some bidders, it may be optimal to bid strategically and manipulate the outcome of the auction. By simulations we show that these opportunities are limited. It is only a small fraction of all bidders that may gain by deviating from submitting true cost bids and this fraction is decreasing as the number of bidders increases. Furthermore, for those that may gain from deviating from telling the truth, the mechanism counteracts strategic bidding in both thin and thick markets. In thin markets deviation have to be large and therefore more risky, in thick markets only small deviations are optimal. The yardstick auction is not efficient nor optimal relative to a situation where the principal articulates his preferences a priori and uses the efficient second score auction. However, the auction approximates efficiency and the cost of not investing sufficient time and money in articulating a scoring function a priori, is also diminishing as the number of bidders increases. Compared with the efficient second score auction, our numerical results suggest that the yardstick auction generates approximately 1% less social values and 2% less private value with 10 or more bidders.

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Bibliographic Info

Paper provided by University of Copenhagen, Department of Food and Resource Economics in its series MSAP Working Paper Series with number 02_2012.

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Length: 19 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:foi:msapwp:02_2012

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Web page: http://www.msap.life.ku.dk/
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Related research

Keywords: Multi-attribute auction; yardstick competition; articulation of preferences; simulation;

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References

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  1. Peter Bogetoft & Kurt Nielsen, 2002. "DEA Based Yardstick Competition in Natural Resource Management," CIE Discussion Papers 2002-04, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  2. Juan Aparicio & Mercedes Landete & Juan Monge & Inmaculada Sirvent, 2008. "A new pricing scheme based on DEA for iterative multi-unit combinatorial auctions," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 16(2), pages 319-344, December.
  3. Babcock, Bruce A. & Lakshminarayan, P. G. & Wu, J. & Zilberman, David, 1997. "Targeting Tools for the Purchase of Environmental Amenities," Staff General Research Papers 5220, Iowa State University, Department of Economics.
  4. Bushnell, James B & Oren, Shmuel S, 1994. "Bidder Cost Revelation in Electric Power Auctions," Journal of Regulatory Economics, Springer, vol. 6(1), pages 5-26, February.
  5. Babcock, Bruce A. & Lakshminarayan, P. G. & Wu, JunJie & Zilberman, David, 1996. "Economics of a Public Fund for Environmental Amenities (The)," Staff General Research Papers 1065, Iowa State University, Department of Economics.
  6. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-83, September.
  7. Teich, Jeffrey E. & Wallenius, Hannele & Wallenius, Jyrki & Koppius, Otto R., 2004. "Emerging multiple issue e-auctions," European Journal of Operational Research, Elsevier, vol. 159(1), pages 1-16, November.
  8. Bogetoft, Peter & Nielsen, Kurt, 2008. "DEA based auctions," European Journal of Operational Research, Elsevier, vol. 184(2), pages 685-700, January.
  9. David Zilberman, 1996. "The Economics of a Public Fund for Environmental Amenities: A Study of CRP Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 961-971.
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