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Procurement (Reverse) Auctions Where Service Providers have Official Ratings

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  • Yigal Gerchak

    () (Department of Industrial Engineering, Tel-Aviv University, Tel Aviv 6997801, Israel)

Abstract

We consider service providers (e.g., contractors) who bid for undertaking a large project — reverse auctions. As there is a risk that the lowest bidder will not be able to complete the project on budget or time, the customer, often a government agency, wishes to incorporate prior information on the bidders reliabilities into the choice of winning bid. We consider the use of official ratings of bidders, which are common knowledge. The customer is assumed to select the bidder for which the ratio of bid to rating is the lowest. A bidder assumes that each other bidder’s bid is the sum of its private value, the ratio of this value to its rating and the inverse of the rating. We characterize the equilibrium bids of two bidders, of n symmetric bidders and of three nonsymmetric bidders, and provide comparative statics and examples. We also discuss a scenario where all ratings are known only to the customer, and each bidder knows only its own rating.

Suggested Citation

  • Yigal Gerchak, 2016. "Procurement (Reverse) Auctions Where Service Providers have Official Ratings," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 18(04), pages 1-10, December.
  • Handle: RePEc:wsi:igtrxx:v:18:y:2016:i:04:n:s021919891650016x
    DOI: 10.1142/S021919891650016X
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    References listed on IDEAS

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    1. Gregory E. Kersten, 2014. "Multiattribute Procurement Auctions: Efficiency and Social Welfare in Theory and Practice," Decision Analysis, INFORMS, vol. 11(4), pages 215-232, December.
    2. Jens Leth Hougaard & Kurt Nielsen & Athanasios Papakonstantinou, 2013. "A Multi-attribute Yardstick Auction without Prior Scoring," MSAP Working Paper Series 02_2013, University of Copenhagen, Department of Food and Resource Economics, revised Mar 2014.
    3. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 169-185, January.
    4. Natalia Santamaría, 2015. "An Analysis of Scoring and Buyer-Determined Procurement Auctions," Production and Operations Management, Production and Operations Management Society, vol. 24(1), pages 147-158, January.
    5. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    6. Wei-Shiun Chang & Bo Chen & Timothy C. Salmon, 2015. "An Investigation of the Average Bid Mechanism for Procurement Auctions," Management Science, INFORMS, vol. 61(6), pages 1237-1254, June.
    7. Jens Leth Hougaard & Kurt Nielsen & Athanasios Papakonstantinou, 2016. "A Sealed-Bid Two-Attribute Yardstick Auction Without Prior Scoring," Group Decision and Negotiation, Springer, vol. 25(4), pages 827-843, July.
    8. Wedad J. Elmaghraby & Elena Katok & Natalia Santamaría, 2012. "A Laboratory Investigation of Rank Feedback in Procurement Auctions," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 128-144, January.
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    Keywords

    Procurement auctions; ratings; equilibrium;

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