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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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File URL: http://pages.stern.nyu.edu/~jasker/AskerCantillonProcurement2006.pdf
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Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 06-24.

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Date of creation: 2006
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Handle: RePEc:ste:nystbu:06-24

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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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  1. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
  2. Patrick Bajari & Robert S. McMillan & Steve Tadelis, 2003. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," NBER Working Papers 9757, National Bureau of Economic Research, Inc.
  3. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
  4. Asker, John & Cantillon, Estelle, 2004. "Properties of Scoring Auctions," CEPR Discussion Papers 4734, C.E.P.R. Discussion Papers.
  5. Juan J. Ganuza & Lambros Pechlivanos, 1998. "Heterogeneity-promoting optimal procurement," Economics Working Papers 377, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1999.
  6. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
  7. Yeon-Koo Che & Ian Gale, 2000. "Optimal Design of Research Contests," Econometric Society World Congress 2000 Contributed Papers 1784, Econometric Society.
  8. Wang, Gyu Ho, 1998. "Bargaining over a Menu of Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 295-305, April.
  9. repec:ste:nystbu:06-22 is not listed on IDEAS
  10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  11. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
  12. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  13. Alejandro M. Manelli & Daniel R. Vincent, 2004. "Multidimensional Mechanism Design: Revenue Maximization and the Multiple-Good Monopoly," Working Papers 2004.153, Fondazione Eni Enrico Mattei.
  14. Border, Kim C, 1991. "Implementation of Reduced Form Auctions: A Geometric Approach," Econometrica, Econometric Society, vol. 59(4), pages 1175-87, July.
  15. Asker, John & Cantillon, Estelle, 2005. "Optimal Procurement When Both Price and Quality Matter," CEPR Discussion Papers 5276, C.E.P.R. Discussion Papers.
  16. Fernando Branco, 1997. "The Design of Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 63-81, Spring.
  17. Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, vol. 4(1), pages 5-29.
  18. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  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.
  20. Taylor, Curtis R, 1993. "Delivery-Contingent Contracts for Research," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 188-203, April.
  21. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-37, October.
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  23. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
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