Procurement When Price and Quality Matter
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 procedure, i.e. the procedure that maximizes the buyer's expected utility. We then use the optimal procedure as a theoretical and numerical benchmark to study practical and simple buying procedures such as scoring auctions and negotiation. Specifically, we derive the restrictions that these simpler procedures place on allocations and compare them with the optimal allocations to generate insights about the properties of these simpler procedures and identify environments where they are likely to do well. We also use the optimal procedure benchmark to compare the performance of these procedures numerically. We find that scoring auctions are able to extract a good proportion of the surplus from being a strategic buyer, that is, the difference between the expected revenue from the optimal mechanism and the efficient auction. Sequential procedures (to which many negotiation processes belong) do less well, and, in fact, often worse than simply holding an efficient auction. In each case, we identify the underlying reason for these results.
(This abstract was borrowed from another version of this item.)
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126|
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven Tadelis, 2009.
"Auctions Versus Negotiations in Procurement: An Empirical Analysis,"
Journal of Law, Economics and Organization,
Oxford University Press, vol. 25(2), pages 372-399, October.
- Patrick Bajari & Robert S. McMillan & Steve Tadelis, 2003. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," NBER Working Papers 9757, National Bureau of Economic Research, Inc.
- Patrick Bajari & Robert McMillan & Steven Tadelis, . "Auctions versus Negotiations in Procurement: An Empirical Analysis," Working Papers 02007, Stanford University, Department of Economics.
- Jehiel, Phillipe & Moldovanu, Benny & Stacchetti, E., 1997.
"Multidimensional Mechanism Design for Auctions with Externalities,"
Sonderforschungsbereich 504 Publications
97-04, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
- Alejandro M. Manelli & Daniel R. Vincent, 1992.
"Optimal Procurement Mechanisms,"
999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, July.
- Bajari, Patrick & Tadelis, Steven, 2001.
"Incentives versus Transaction Costs: A Theory of Procurement Contracts,"
RAND Journal of Economics,
The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
- Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
- Fernando Branco, 1997. "The Design of Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 63-81, Spring.
- Ganuza, Juan-Jose & Pechlivanos, Lambros, 2000.
"Heterogeneity-promoting optimal procurement,"
Elsevier, vol. 67(1), pages 105-112, April.
- Asker, John & Cantillon, Estelle, 2004.
"Properties of Scoring Auctions,"
CEPR Discussion Papers
4734, C.E.P.R. Discussion Papers.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
- repec:oup:restud:v:67:y:2000:i:3:p:455-81 is not listed on IDEAS
- Laffont, Jean-Jacques & Tirole, Jean, 1987.
"Auctioning Incentive Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 95(5), pages 921-37, October.
- Alejandro M. Manelli & Daniel R. Vincent, 2004.
"Multidimensional Mechanism Design: Revenue Maximization and the Multiple-Good Monopoly,"
2004.153, Fondazione Eni Enrico Mattei.
- Manelli, Alejandro M. & Vincent, Daniel R., 2007. "Multidimensional mechanism design: Revenue maximization and the multiple-good monopoly," Journal of Economic Theory, Elsevier, vol. 137(1), pages 153-185, November.
- Asker, John & Cantillon, Estelle, 2005. "Optimal Procurement When Both Price and Quality Matter," CEPR Discussion Papers 5276, C.E.P.R. Discussion Papers.
- Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
- repec:oup:restud:v:65:y:1998:i:2:p:295-305 is not listed on IDEAS
- Border, Kim C, 1991. "Implementation of Reduced Form Auctions: A Geometric Approach," Econometrica, Econometric Society, vol. 59(4), pages 1175-87, July.
- Mark Armstrong, 2000. "Optimal Multi-Object Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 455-481.
- repec:ste:nystbu:06-22 is not listed on IDEAS
- Yeon-Koo Che, 1993.
"Design Competition through Multidimensional Auctions,"
RAND Journal of Economics,
The RAND Corporation, vol. 24(4), pages 668-680, Winter.
- Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers 9123, Wisconsin Madison - Social Systems.
- Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, vol. 4(1), pages 5-29.
- Yeon-Koo Che & Ian Gale, 2003.
"Optimal Design of Research Contests,"
American Economic Review,
American Economic Association, vol. 93(3), pages 646-671, June.
- Yeon-Koo Che & Ian Gale, 2000. "Optimal Design of Research Contests," Econometric Society World Congress 2000 Contributed Papers 1784, Econometric Society.
- Taylor, Curtis R, 1993. "Delivery-Contingent Contracts for Research," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 188-203, April.
- Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
When requesting a correction, please mention this item's handle: RePEc:ste:nystbu:06-24. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Viveca Licata)
If references are entirely missing, you can add them using this form.