Procurement When Price and Quality Matter

43 Pages Posted: 2 Aug 2007

See all articles by John Asker

John Asker

UCLA

Estelle Cantillon

Free University of Brussels (VUB/ULB) - ECARES; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

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 (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.

Keywords: Bargaining, multidimensional signal, optimal auction, procurement, quality, scoring auction

JEL Classification: C78, D44, D82, L22, L24

Suggested Citation

Asker, John William and Cantillon, Estelle, Procurement When Price and Quality Matter (February 2007). CEPR Discussion Paper No. 6082, Available at SSRN: https://ssrn.com/abstract=1004569

John William Asker (Contact Author)

UCLA ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Estelle Cantillon

Free University of Brussels (VUB/ULB) - ECARES ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
B-1050 Brussels
Belgium
+32 2 650 3840 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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