Optimal Procurement When Both Price and Quality Matter

68 Pages Posted: 18 Nov 2005

See all articles by John Asker

John Asker

UCLA

Estelle Cantillon

Free University of Brussels (VUB/ULB) - ECARES; Centre for Economic Policy Research (CEPR)

Date Written: October 2005

Abstract

A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost + marginal cost of providing quality). We solve for the optimal buying mechanism, i.e., the procedure that maximizes the buyer's expected utility, and discuss its properties. Many of the properties of the optimal buying mechanism when information is one-dimensional (Laffont and Tirole, 1987; Che, 1993) no longer hold when we introduce private information about the fixed costs. We compare the performance of the optimal scheme to that of buying procedures used in practice, namely a quasilinear scoring auction and negotiation. Specifically, we characterize an upper bound to what a quasilinear scoring auction and negotiation can achieve, and compare the performance of these procedures numerically. Quasilinear scoring auctions are able to extract a good proportion of the surplus from being strategic. Negotiation does less well. In fact, our results suggest that negotiation does worse than holding a simple scoring auction where the buyer reveals his preference.

Keywords: Optimal auction, multi-attribute auction, differentiated product, multidimensional screening, scoring auction, negotiation, bargaining, procurement

JEL Classification: C78, D44, D82, L22, L24

Suggested Citation

Asker, John William and Cantillon, Estelle, Optimal Procurement When Both Price and Quality Matter (October 2005). CEPR Discussion Paper No. 5276, Available at SSRN: https://ssrn.com/abstract=851190

John William Asker

UCLA ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Estelle Cantillon (Contact Author)

Free University of Brussels (VUB/ULB) - ECARES ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
B-1050 Brussels
Belgium
+32 2 650 3840 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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