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A Simple Multi-attribute Yardstick Auction Without Prior Scoring

Author

Listed:
  • 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.

Suggested Citation

  • Jens Leth Hougaard & Kurt Nielsen & Athanasios Papakonstantinou, 2012. "A Simple Multi-attribute Yardstick Auction Without Prior Scoring," MSAP Working Paper Series 02_2012, University of Copenhagen, Department of Food and Resource Economics.
    • Handle: RePEc:foi:msapwp:02_2012
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    File URL: http://okonomi.foi.dk/workingpapers/MSAPpdf/MSAP2012/MSAP_WP02_2012.pdf
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    References listed on IDEAS

    as
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    Keywords

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