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Procurement Auctions for Differentiated Goods

Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, 361005 Fujian, People's Republic of China
Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, Georgia 30302
jason.shachat{at}gmail.com
swarthout{at}gsu.edu

We consider two mechanisms to procure differentiated goods: a sealed-bid buyer-determined auction and a dynamic-bid price-based auction with bidding credits. The sealed-bid buyer-determined auction is analogous to the "request for quote" procedure commonly used by procurement agencies, and has each seller submit a price and the inherent quality of his good. Then the buyer selects the seller who offers the greatest difference in quality and price. In the dynamic-bid price-based auction with bidding credits, the buyer assigns a bidding credit to each seller conditional upon the quality of the seller's good. Then the sellers compete in an English auction, with the winner receiving the auction price and his bidding credit. Game-theoretic models predict the sealed-bid buyer-determined auction is socially efficient but the dynamic-bid price-based auction with bidding credits is not. The optimal bidding credit assignment undercompensates for quality advantages, creating a market distortion in which the buyer captures surplus at the expense of the seller's profit and social efficiency. In our experiment, the sealed-bid buyer-determined auction is less efficient than the dynamic-bid price-based auction with bidding credits. Moreover, both the buyer and seller receive more surplus in the dynamic-bid price-based auction with bidding credits.

Key Words: procurement; auction; product differentiation; experiment
History: Received on April 20, 2009.