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Procurement when price and quality matter

Author

Listed:
  • John Asker
  • Estelle Cantillon

Abstract

A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure ( xed cost and marginal cost of providing quality). We characterize the buyers optimal buying mechanism. We then use the optimal mechanism as a theoretical and numerical benchmark to study simpler buying procedures such as scoring auctions and bargaining. Scoring auctions can extract a signifi cant proportion of the buyers strategic surplus (the difference between the expected utility from the optimal mechanism and the e¢ cient auction). Bargaining does less well and often does worse than the e¢ cient auction.

Suggested Citation

  • John Asker & Estelle Cantillon, 2010. "Procurement when price and quality matter," ULB Institutional Repository 2013/99378, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/99378
    Note: FLWIN
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    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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