DP5276 Optimal Procurement When Both Price and Quality Matter
|Author(s):||John Asker, Estelle Cantillon|
|Publication Date:||October 2005|
|Keyword(s):||bargaining, differentiated product, multi-attribute auction, multidimensional screening, negotiation, optimal auction, procurement, scoring auction|
|JEL(s):||C78, D44, D82, L22, L24|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5276|
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.