IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v41y1995i4p561-576.html
   My bibliography  Save this article

Bidding for Contests

Author

Listed:
  • Sudhindra Seshadri

    (College of Business and Management, University of Maryland, College Park, Maryland 20742)

Abstract

The procurement of product development and production services brings special strategic considerations to the buyer-seller relationship in industrial and institutional markets. Multiple sourcing, in particular dual sourcing, is a likely way of dealing with the increased risks faced by buyers. However, there is lack of dual sourcing models that analyze the selection and control process in an integrated fashion. This omission had led to apparently contradictory findings in agency and auction theory. The paper models the strategic issues for a cost containment contest between two suppliers. The suppliers are drawn from several vendors who participate in a bidding competition. The supplier with the lower final cost in the contest wins a larger share of the pooled profit fee. Propositions are derived for the optimal cost-plus contest, and comparisons are made with the common incentive contract for the integrated selection and control model. The larger the winner's share, the greater the effort. The buyer can make a credible commitment to the optimal winner's share. As the winner's share rises, however, the bid prices increase due to increased contract risk. This incentive-risk tradeoff determines (a) the optimal winner's share that minimizes expected procurement price, (b) the corresponding profit fee bid by suppliers, (c) the ensuing cost control effort, and (d) the final price for the procurement. Comparisons with the common incentive contract tell us when the cost-plus contest induces more effort, and when bidding for a contest results in a lower final procurement price.

Suggested Citation

  • Sudhindra Seshadri, 1995. "Bidding for Contests," Management Science, INFORMS, vol. 41(4), pages 561-576, April.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:4:p:561-576
    DOI: 10.1287/mnsc.41.4.561
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.41.4.561
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.41.4.561?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hongmin Li & Hao Zhang & Charles H. Fine, 2013. "Dynamic Business Share Allocation in a Supply Chain with Competing Suppliers," Operations Research, INFORMS, vol. 61(2), pages 280-297, April.
    2. Diwakar Gupta & Mili Mehrotra, 2015. "Bundled Payments For Healthcare Services: Proposer Selection and Information Sharing," Operations Research, INFORMS, vol. 63(4), pages 772-788, August.
    3. Gérard P. Cachon & Fuqiang Zhang, 2007. "Obtaining Fast Service in a Queueing System via Performance-Based Allocation of Demand," Management Science, INFORMS, vol. 53(3), pages 408-420, March.
    4. Wagner, Stephan M. & Friedl, Gunther, 2007. "Supplier switching decisions," European Journal of Operational Research, Elsevier, vol. 183(2), pages 700-717, December.
    5. Gurnani, Haresh & Ray, Tridip, 2003. "A Procurement Auction Model Under Supplier Uncertainty," MPRA Paper 9990, University Library of Munich, Germany.
    6. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    7. Lim, Wei Shi & Tan, Soo Jiuan, 2010. "Outsourcing suppliers as downstream competitors: Biting the hand that feeds," European Journal of Operational Research, Elsevier, vol. 203(2), pages 360-369, June.
    8. Wedad J. Elmaghraby, 2000. "Supply Contract Competition and Sourcing Policies," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 350-371, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:41:y:1995:i:4:p:561-576. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.