Design Competition through Multidimensional Auctions

This article studies design competition in government procurements by developing a model of two-dimensional auctions, where firms bid on both price and quality, and bids are evaluated by a scoring rule designed by a buyer. Three auction schemes -- first score, second score, and second preferred offer -- are introduced and related to actual practices. If the buyer can commit to a scoring rule in his best interest, the resulting optimal scoring rule underrewards quality relative to the buyer's utility function and implements the optimal outcome for the buyer under first- and second-score auctions. Absent the commitment power, the only feasible scoring rule is the buyer's utility function, under which (1) all three schemes yield the same expected utility to the buyer, and (2) first- and second-score auctions induce the first-best level of quality, which turns out to be excessive from the buyer's point of view.