Procurement Auctions for Differentiated Goods

36 Pages Posted: 3 Feb 2011

See all articles by J. Todd Swarthout

J. Todd Swarthout

Georgia State University - Andrew Young School of Policy Studies

Jason M. Shachat

National University of Singapore (NUS) - Department of Economics

Date Written: April 20, 2009

Abstract

We consider two mechanisms to procure differentiated goods: a request for quote and an English auction with bidding credits. In the request for quote, each seller submits a price and the inherent quality of his good. Then the buyer selects the seller who offers the greatest difference in quality and price. In the English auction with bidding credits, the buyer assigns a bidding credit to each seller conditional upon the quality of the seller’s good. Then the sellers compete in an English auction with the winner receiving the auction price and his bidding credit. Game theoretic models predict the request for quote is socially efficient but the English auction with bidding credits is not. The optimal bidding credit assignment under compensates for quality advantages, creating a market distortion in which the buyer captures surplus at the expense of the seller’s profit and social efficiency. In experiments, the request for quote is less efficient than the English auctions with bidding credits. Moreover, both the buyer and seller receive more surplus in the English auction with bidding credits.

Keywords: Procurement, Auction, Product Differentiation, Experiment

JEL Classification: C7, C9, L1

Suggested Citation

Swarthout, J. Todd and Shachat, Jason, Procurement Auctions for Differentiated Goods (April 20, 2009). Andrew Young School of Policy Studies Research Paper Series No. 11-08, Available at SSRN: https://ssrn.com/abstract=1754067 or http://dx.doi.org/10.2139/ssrn.1754067

J. Todd Swarthout (Contact Author)

Georgia State University - Andrew Young School of Policy Studies ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Jason Shachat

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

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