An Empirical Analysis of Price, Quality, and Incumbency in Procurement Auctions

47 Pages Posted: 29 Sep 2013 Last revised: 27 Oct 2015

See all articles by Tunay I. Tunca

Tunay I. Tunca

University of Maryland - Robert H. Smith School of Business

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business

Fang Zhong

Zurich Financial Services Group

Date Written: December 17, 2013

Abstract

The use of multi-attribute auctions for procurement of products and services when both price and quality matter is becoming more frequent. Such auctions often employ scoring rules and are open-ended in winner determination. Yet there is a significant gap in the literature on studying the efficiency of these procurement mechanisms. In this paper, providing a theoretical model and utilizing data from legal service procurement auctions, we study how open-ended scoring auctions can be used effectively in procurement, and demonstrate the roles supplier quality and incumbency play in this process. We demonstrate that open-ended auctions can generate substantial savings to a buyer without compromising quality. We study the underlying mechanism and show how the auction format can work to achieve such performance. We find that the buyer's revealed preferences significantly differ from her stated preferences. Finally, we contribute to the understanding of the role of incumbency in procurement auctions by providing evidence that what may be perceived as incumbency bias can in fact be a revelation of preference for quality.

Suggested Citation

Tunca, Tunay I. and Wu, D. J. and Zhong, Fang, An Empirical Analysis of Price, Quality, and Incumbency in Procurement Auctions (December 17, 2013). Robert H. Smith School Research Paper. Available at SSRN: https://ssrn.com/abstract=2332533 or http://dx.doi.org/10.2139/ssrn.2332533

Tunay I. Tunca (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )

800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/wu

Fang Zhong

Zurich Financial Services Group ( email )

Zurich
Switzerland

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