Measuring the Performance of Large-Scale Combinatorial Auctions: A Structural Estimation Approach

Management Science 60(5):1180-1201

37 Pages Posted: 3 May 2012 Last revised: 8 Oct 2016

See all articles by Sang Won Kim

Sang Won Kim

KAIST College of Business

Marcelo Olivares

University of Chile; University of Chile - Engineering Department

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University

Date Written: December 1, 2012

Abstract

The main advantage of a procurement combinatorial auction (CA) is that it allows suppliers to express cost synergies through package bids. However, bidders can also strategically take advantage of this flexibility, by discounting package bids and "inflating"' bid prices for single-items, even in the absence of cost synergies; the latter behavior can hurt the performance of the auction. It is an empirical question whether allowing package bids and running a CA improves performance in a given setting. In this paper, we develop a structural estimation approach that estimates the firms' cost structure using bidding data, and we use these estimates to evaluate the performance of the auction. To overcome the computational difficulties arising from the large number of bids observed in large-scale CAs, we propose a novel simplified model of bidders' behavior based on pricing package characteristics. We apply our method to the Chilean school meals auction, in which the government procures half a billion dollars' worth of meal services every year and bidders submit thousands of package bids. Our estimates suggest that bidders' cost synergies are economically significant in this application (~5%), and the current CA mechanism achieves high allocative efficiency (~98%) and reasonable margins for the bidders (~5%). Overall, this work develops the first practical tool to evaluate the performance of large-scale first-price CAs commonly used in procurement settings.

Keywords: Combinatorial auctions, Procurement, Structural estimation, Econometrics, Public sector applications

Suggested Citation

Kim, Sang Won and Olivares, Marcelo and Weintraub, Gabriel Y., Measuring the Performance of Large-Scale Combinatorial Auctions: A Structural Estimation Approach (December 1, 2012). Management Science 60(5):1180-1201, Available at SSRN: https://ssrn.com/abstract=2050191 or http://dx.doi.org/10.2139/ssrn.2050191

Sang Won Kim

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Marcelo Olivares (Contact Author)

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

University of Chile - Engineering Department ( email )

Republica 701 Santiago
Chile

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University ( email )

Stanford, CA 94305
United States

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