'Now or Later?': When to Deploy Qualification Screening in Open-Bid Auction for Re-Sourcing
40 Pages Posted: 8 May 2019
Date Written: April 13, 2019
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
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