Procurement with Reverse Auction and Flexible Noncompetitive Contracts

Sean X. Zhou, Zhijie Tao, Nianbing Zhang, and Gangshu Cai. 2015. Procurement with Reverse Auction and Ex Ante Flexible Noncompetitive Contracts. Decision Sciences. 47(3), 554–581.

47 Pages Posted: 27 Feb 2012 Last revised: 12 Aug 2017

See all articles by Sean Zhou

Sean Zhou

The Chinese University of Hong Kong (CUHK)

Zhijie Tao

The Chinese University of Hong Kong (CUHK)

Nianbing Zhang

CITIC Securities

Gangshu (George) Cai

Santa Clara University

Date Written: February 15, 2015

Abstract

This paper investigates a hybrid procurement mechanism that combines a reverse auction with flexible noncompetitive contracts. A buyer adopts such mechanism to procure multiple units of a product from a group of potential suppliers. Specifically, the buyer first offers contracts to some suppliers who, if accepting the contract, do not participate in the auction while committing to selling a unit to the buyer at the price of the subsequent auction. For the suppliers rejecting the offers, they can join the subsequent auction with the other suppliers to compete on the remaining units. When the buyer offers only one flexible noncompetitive contract, we find the selected supplier may accept the offer regardless of whether he knows his exact cost information. Meanwhile, the buyer can benefit from offering such a contract, as opposed to solely conducting a regular reverse auction or offering a noncompetitive contract that does not allow suppliers declining offers to join the subsequent auction. Moreover, we find that the suppliers’ information about their own costs has a significant impact on the buyer’s decision. When the buyer makes multiple offers, we analyze the resulting game behavior of the selected suppliers and demonstrate that the buyer can benefit more than just offering one such contract. Therefore, the hybrid procurement mechanism can be mutually beneficial for both the buyer and the selected suppliers.

Keywords: Multi-unit reverse auction, procurement, Nash equilibrium, flexible noncompetitive contracts

Suggested Citation

Zhou, Sean and Tao, Zhijie and Zhang, Nianbing and Cai, Gangshu (George), Procurement with Reverse Auction and Flexible Noncompetitive Contracts (February 15, 2015). Sean X. Zhou, Zhijie Tao, Nianbing Zhang, and Gangshu Cai. 2015. Procurement with Reverse Auction and Ex Ante Flexible Noncompetitive Contracts. Decision Sciences. 47(3), 554–581., Available at SSRN: https://ssrn.com/abstract=2012130 or http://dx.doi.org/10.2139/ssrn.2012130

Sean Zhou (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Zhijie Tao

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Nianbing Zhang

CITIC Securities ( email )

Beijing
China

Gangshu (George) Cai

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA CA 95053
United States
4085542785 (Phone)

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