'Now or Later?': When to Deploy Qualification Screening in Open-Bid Auction for Re-Sourcing

40 Pages Posted: 8 May 2019

See all articles by Wen Zhang

Wen Zhang

University of Texas at Dallas - Naveen Jindal School of Management

Qi (George) Chen

London Business School

Elena Katok

University of Texas at Dallas

Date Written: April 13, 2019

Abstract

This paper considers a re-sourcing setting in which a qualified supplier (the incumbent) and multiple suppliers that have not yet been qualified (the entrants) compete in an open-bid descending auction for a single-supplier contract. Due to the risk of supplier nonperformance, the buyer only awards the contract to a qualified supplier; meanwhile, the buyer can conduct supplier qualification screening at a cost, to verify whether the entrant suppliers can perform the contract. Conventionally, the buyer would screen entrants before running an auction, i.e., the pre-qualification strategy. We explore an alternative approach called post-qualification strategy, in which the buyer first runs an auction and then conducts qualification screenings based on the suppliers' auction bids. By characterizing the dynamic structure of the suppliers' equilibrium bidding strategy, we are able to calculate the buyer's expected cost under post-qualification strategy, which is computationally impossible without this characterization. This allows us to use a comprehensive numerical study to investigate the buyer's optimal choice between pre-qualification and post-qualification. We find that adding post-qualification strategy as an option can provide significant cost-savings over the conventional approach. We also identify scenarios in which post-qualification strategy is most beneficial to the buyer.

Keywords: procurement, supplier asymmetry, open-bid auction, qualification screening

Suggested Citation

Zhang, Wen and Chen, Qi (George) and Katok, Elena, 'Now or Later?': When to Deploy Qualification Screening in Open-Bid Auction for Re-Sourcing (April 13, 2019). Available at SSRN: https://ssrn.com/abstract=3371363 or http://dx.doi.org/10.2139/ssrn.3371363

Wen Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Qi (George) Chen (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 (0)20 7000 8848 (Phone)
+44 (0)20 7000 7001 (Fax)

HOME PAGE: http://www.georgeqc.com

Elena Katok

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

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