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Keywords:

  • procurement auctions;
  • buyer-determined auctions;
  • bidding strategies

In procurement auctions, the object for sale is a contract, bidders are suppliers, and the bid taker is a buyer. The suppliers bidding for the contract are usually the current supplier (the incumbent) and a group of potential new suppliers (the entrants). As the buyer has an ongoing relationship with the incumbent, he needs to adjust the bids of the entrants to include non-price attributes, such as the switching costs. The buyer can run a scoring auction, in which suppliers compete on the adjusted bids or scores, or, he can run a buyer-determined auction, in which suppliers compete on the price, and the buyer adjusts a certain number of the bids with the non-price attributes after the auction to determine the winner. Unless the incumbent has a significant cost advantage over the entrants, I find that the scoring auction yields a lower average cost for the buyer, if the non-price attributes are available. If the non-price attributes are difficult or expensive to obtain, the buyer could run a buyer-determined auction adjusting only the lowest price bid.