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An Inverse-Optimization-Based Auction Mechanism to Support a Multiattribute RFQ Process

Author

Listed:
  • Damian R. Beil

    () (University of Michigan Business School, Ann Arbor, Michigan 48109-1234)

  • Lawrence M. Wein

    () (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

Abstract

We consider a manufacturer who uses a reverse, or procurement, auction to determine which supplier will be awarded a contract. Each bid consists of a price and a set of nonprice attributes (e.g., quality, lead time). The manufacturer is assumed to know the parametric form of the suppliers' cost functions (in terms of the nonprice attributes), but has no prior information on the parameter values. We construct a multiround open-ascending auction mechanism, where the manufacturer announces a slightly different scoring rule (i.e., a function that ranks the bids in terms of the price and nonprice attributes) in each round. Via inverse optimization, the manufacturer uses the bids from the first several rounds to learn the suppliers' cost functions, and then in the final round chooses a scoring rule that attempts to maximize his own utility. Under the assumption that suppliers submit their myopic best-response bids in the last round, and do not distort their bids in the earlier rounds (i.e., they choose their minimum-cost bid to achieve any given score), our mechanism, indeed, maximizes the manufacturer's utility within the open-ascending format. We also discuss several enhancements that improve the robustness of our mechanism with respect to the model's informational and behavioral assumptions.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:11:p:1529-1545
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    File URL: http://dx.doi.org/10.1287/mnsc.49.11.1529.20588
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    References listed on IDEAS

    as
    1. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
    2. Frank Kelly & Richard Steinberg, 2000. "A Combinatorial Auction with Multiple Winners for Universal Service," Management Science, INFORMS, vol. 46(4), pages 586-596, April.
    3. Peter Cramton & John McMillan & Paul Milgrom & Bradley Miller & Bridger Mitchell & Daniel Vincent & Robert Wilson, 1998. "Simultaneous Ascending Auctions with Package Bidding," Papers of Peter Cramton 98cra2, University of Maryland, Department of Economics - Peter Cramton.
    4. Cramton, Peter, 1998. "Ascending auctions," European Economic Review, Elsevier, vol. 42(3-5), pages 745-756, May.
    5. Fernando Branco, 1997. "The Design of Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 63-81, Spring.
    6. Wellman, Michael P. & Walsh, William E. & Wurman, Peter R. & MacKie-Mason, Jeffrey K., 2001. "Auction Protocols for Decentralized Scheduling," Games and Economic Behavior, Elsevier, vol. 35(1-2), pages 271-303, April.
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