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Optimal Procurement When Both Price and Quality Matter


  • Asker, John
  • Cantillon, Estelle


A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost + marginal cost of providing quality). We solve for the optimal buying mechanism, i.e. the procedure that maximizes the buyer’s expected utility, and discuss its properties. Many of the properties of the optimal buying mechanism when information is one-dimensional (Laffont and Tirole, 1987; Che, 1993) no longer hold when we introduce private information about the fixed costs. We compare the performance of the optimal scheme to that of buying procedures used in practice, namely a quasilinear scoring auction and negotiation. Specifically, we characterize an upper bound to what a quasilinear scoring auction and negotiation can achieve, and compare the performance of these procedures numerically. Quasilinear scoring auctions are able to extract a good proportion of the surplus from being strategic. Negotiation does less well. In fact, our results suggest that negotiation does worse than holding a simple scoring auction where the buyer reveals his preference.

Suggested Citation

  • Asker, John & Cantillon, Estelle, 2005. "Optimal Procurement When Both Price and Quality Matter," CEPR Discussion Papers 5276, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5276

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    References listed on IDEAS

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    Cited by:

    1. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.
    2. John Asker & Estelle Cantillon, 2010. "Procurement when price and quality matter," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 1-34.
    3. Ciaccia, Gervasio & Doni, Nicola & Fontini, Fulvio, 2010. "Auctioning wind power sites when environmental quality matters," Energy Policy, Elsevier, vol. 38(4), pages 1734-1740, April.
    4. Pierangelo Mori, 2008. "Design of Multidimensional Franchise Auctions by an Ignorant Principal," Working Papers - Economics wp2008_13.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    5. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.

    More about this item


    bargaining; differentiated product; multi-attribute auction; multidimensional screening; negotiation; optimal auction; procurement; scoring auction;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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