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Procurement Auctions with General Price-Quality Evaluation

Author

Listed:
  • Makoto HANAZONO

    () (School of Economics, Nagoya University)

  • Jun NAKABAYASHI

    () (Institute of Social and Economic Research, Osaka University)

  • Masanori TSURUOKA

    () (Department of Economics, University of Tokyo)

Abstract

We offer a general framework to study procurement auctions when quality matters. In this environment, sellers compete for a project by bidding a price-quality pair, and the winning bidder is determined by the score assigned to each bid. In contrast to the existing study in which only the quasilinear scoring rule is considered, our analysis allows a broad class of scoring rules including many other realistic ones. We focus on the analyses of the equilibrium bidding behavior of first-score (FS) and second-score (SS) auctions. We find that FS or SS auctions can be transformed into equivalent, single-dimensional score-bid auctions where the bidder's utility (payoff upon winning) is non-linear in the score-bid. Our analysis demonstrates that the ranking of the two auction formats, in terms of expected scores, depends on the scoring rule and that the equivalence fails unless scoring rules are quasilinear. FS auctions induce less aggressive bidding than SS auctions if, for example, the scoring rule is price-quality ratio (PQR).

Suggested Citation

  • Makoto HANAZONO & Jun NAKABAYASHI & Masanori TSURUOKA, 2013. "Procurement Auctions with General Price-Quality Evaluation," KIER Working Papers 845, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:845
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP845.pdf
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    References listed on IDEAS

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    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. Nakabayashi, Jun, 2013. "Small business set-asides in procurement auctions: An empirical analysis," Journal of Public Economics, Elsevier, vol. 100(C), pages 28-44.
    3. Robert G. Hansen, 1988. "Auctions with Endogenous Quantity," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 44-58, Spring.
    4. Bergman, Mats & Lundberg, Sofia, 2011. "Tender Evaluation and Award Methodologies in Public Procurement," Umeå Economic Studies 821, Umeå University, Department of Economics.
    5. Fernando Branco, 1997. "The Design of Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 63-81, Spring.
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    Citations

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    Cited by:

    1. Gian Luigi Albano & Berardino Cesi & Alberto Iozzi, 2017. "Teaching an old dog a new trick: reserve price and unverifiable quality in repeated procurement," CEIS Research Paper 404, Tor Vergata University, CEIS, revised 05 May 2017.
    2. Albano, Gian Luigi & Cesi, Berardino & Iozzi, Alberto, 2017. "Public procurement with unverifiable quality: The case for discriminatory competitive procedures," Journal of Public Economics, Elsevier, vol. 145(C), pages 14-26.
    3. Thomas Giebe & Paul Schweinzer, 2015. "Probabilistic procurement auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 19(1), pages 25-46, March.
    4. Dastidar, Krishnendu Ghosh & Mukherjee, Diganta, 2014. "Corruption in delegated public procurement auctions," European Journal of Political Economy, Elsevier, vol. 35(C), pages 122-127.
    5. Krishnendu Ghosh Dastidar, 2014. "Scoring auctions with non-quasilinear scoring rules," ISER Discussion Paper 0902, Institute of Social and Economic Research, Osaka University.
    6. Miguel Vazquez & Michelle Hallack, 2017. "Efficiency versus transaction costs in multidimensional auctions: the case of Brazilian oil and gas lease auctions," IEFE Working Papers 94, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
    7. Takeshi Nishimura, 2015. "Optimal design of scoring auctions with multidimensional quality," Review of Economic Design, Springer;Society for Economic Design, vol. 19(2), pages 117-143, June.
    8. NAKABAYASHI Jun & HIROSE Yohsuke, 2016. "Structural Estimation of the Scoring Auction Model," Discussion papers 16008, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    scoring auctions; non-quasilinear scoring rules; procurement;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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