IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Contingent payment auction mechanism in multidimensional procurement auctions

  • Wang, Hong
Registered author(s):

    This paper considers the auctioning of an indivisible project among several suppliers who hold private information about their own efficiency type. Both quality and price need to be determined. Different from scoring auctions, we present a new method, i.e., contingent payment auction mechanism (CPAM), which can effectively deal with the optimal procurement strategy in multidimensional procurement auctions. CPAM can implement the optimal mechanism for the buyer and is thus optimal among all possible procurement strategies. CPAM implies that the buyer should first design and announce a contingent payment function that specifies a payment for each possible quality level before the bidding begins. Compared to scoring auctions, CPAM has some advantages. It does not require a special form of scoring rule and can be generalized in a more broad auction formats. Furthermore, it can help us to solve the ex post moral hazard problem. We consider two kinds of CPAM. For the CPAM I is sensitive to different auction formats, we come up with CPAM II which can improve the performance of CPAM I. Broadly speaking, CPAM integrates the idea of dimension reduction from scoring auction into that of incentive contract design from contract theory to solve the problem of ex post moral hazard.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221712006029
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 224 (2013)
    Issue (Month): 2 ()
    Pages: 404-413

    as
    in new window

    Handle: RePEc:eee:ejores:v:224:y:2013:i:2:p:404-413
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. John Asker & Estelle Cantillon, 2008. "Properties of scoring auctions," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 69-85.
    3. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
    4. Ching-Hua Chen-Ritzo & Terry P. Harrison & Anthony M. Kwasnica & Douglas J. Thomas, 2005. "Better, Faster, Cheaper: An Experimental Analysis of a Multiattribute Reverse Auction Mechanism with Restricted Information Feedback," Management Science, INFORMS, vol. 51(12), pages 1753-1762, December.
    5. Hariga, Moncer & Ben-Daya, Mohamed, 1999. "Some stochastic inventory models with deterministic variable lead time," European Journal of Operational Research, Elsevier, vol. 113(1), pages 42-51, February.
    6. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    7. 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.
    8. Louly, Mohamed-Aly Ould & Dolgui, Alexandre, 2009. "Calculating safety stocks for assembly systems with random component procurement lead times: A branch and bound algorithm," European Journal of Operational Research, Elsevier, vol. 199(3), pages 723-731, December.
    9. von Ungern-Sternberg, Thomas, 1994. "Quality incentives in auctions for construction contracts," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 89-104, March.
    10. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
    11. David C. Parkes & Jayant Kalagnanam, 2005. "Models for Iterative Multiattribute Procurement Auctions," Management Science, INFORMS, vol. 51(3), pages 435-451, March.
    12. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
    13. Lorentziadis, Panos L., 2010. "Post-objective determination of weights of the evaluation factors in public procurement tenders," European Journal of Operational Research, Elsevier, vol. 200(1), pages 261-267, January.
    14. Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
    15. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
    16. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
    17. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
    18. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
    19. Fangruo Chen, 2007. "Auctioning Supply Contracts," Management Science, INFORMS, vol. 53(10), pages 1562-1576, October.
    20. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-75, September.
    21. 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.
    22. Bottani, Eleonora & Rizzi, Antonio, 2008. "An adapted multi-criteria approach to suppliers and products selection--An application oriented to lead-time reduction," International Journal of Production Economics, Elsevier, vol. 111(2), pages 763-781, February.
    23. Xu, He & Shi, Ning & Ma, Shi-hua & Lai, Kin Keung, 2010. "Contracting with an urgent supplier under cost information asymmetry," European Journal of Operational Research, Elsevier, vol. 206(2), pages 374-383, October.
    24. Ryu, Kwangyeol & Yücesan, Enver, 2010. "A fuzzy newsvendor approach to supply chain coordination," European Journal of Operational Research, Elsevier, vol. 200(2), pages 421-438, January.
    25. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
    26. Fuqiang Zhang, 2010. "Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 608-626, August.
    27. Damian R. Beil & Lawrence M. Wein, 2003. "An Inverse-Optimization-Based Auction Mechanism to Support a Multiattribute RFQ Process," Management Science, INFORMS, vol. 49(11), pages 1529-1545, November.
    28. Stadtler, Hartmut, 2005. "Supply chain management and advanced planning--basics, overview and challenges," European Journal of Operational Research, Elsevier, vol. 163(3), pages 575-588, June.
    29. Lau, Amy Hing Ling & Lau, Hon-Shiang & Wang, Jian-Cai, 2008. "How a dominant retailer might design a purchase contract for a newsvendor-type product with price-sensitive demand," European Journal of Operational Research, Elsevier, vol. 190(2), pages 443-458, October.
    30. Richard Engelbrecht-Wiggans & Ernan Haruvy & Elena Katok, 2007. "A Comparison of Buyer-Determined and Price-Based Multiattribute Mechanisms," Marketing Science, INFORMS, vol. 26(5), pages 629-641, 09-10.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:224:y:2013:i:2:p:404-413. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.