e-Sourcing in Procurement: Theory and Behavior in Reverse Auctions with Non-Competitive Contracts

31 Pages Posted: 28 Mar 2005  

Richard Engelbrecht-Wiggans

University of Illinois at Urbana-Champaign - Department of Business Administration

Elena Katok

University of Texas at Dallas

Date Written: October 22, 2004

Abstract

One of the goals of procurement is to establish a fair price while affording the buyer some flexibility in selecting the suppliers to deal with. Reverse auctions do not have this flexibility, because it is the auction rules and not the buyer that determine the winner. But an important advantage of having this flexibility is that it allows buyers and suppliers to establish long-term relationships. This is one of the reasons that buyers often combine non-competitive purchasing with auctions. We find that in theory such hybrid mechanisms that remove some suppliers and a corresponding amount of demand from the auction market increase competition and make buyers better off as long as suppliers are willing to accept non-competitive contracts. And it turns out that suppliers often do because under a wide variety of conditions these contracts have a positive expected profit. Our theory relies on two behavioral assumptions: (1) bidders in a multi-unit uniform-price reverse auction will follow the dominant strategy of bidding truthfully, and (2) the suppliers who have been removed from the market will accept non-competitive contracts that have a positive expected profit. Our experiment demonstrates that bidders in the auction behave very close to following the dominant strategy regardless of whether this auction is a stand-alone or a part of a hybrid mechanism. We also find that suppliers accept non-competitive contracts sufficiently often (although not always) to make the hybrid mechanism outperform the reverse auction in the laboratory as well as in theory.

Keywords: Multi-unit auctions, experimental economics, strategic procurement

JEL Classification: C72, D83, D44, C91

Suggested Citation

Engelbrecht-Wiggans, Richard and Katok, Elena, e-Sourcing in Procurement: Theory and Behavior in Reverse Auctions with Non-Competitive Contracts (October 22, 2004). Available at SSRN: https://ssrn.com/abstract=673562 or http://dx.doi.org/10.2139/ssrn.673562

Richard Engelbrecht-Wiggans (Contact Author)

University of Illinois at Urbana-Champaign - Department of Business Administration ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-1028 (Phone)

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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