Auctions, Negotiation and Hybrid Mechanisms in Procurement

Principal Investigators: Achim Wambach, Elena Katok

In procurement, the use of auctions has first exploded in late 1990's fuelled by advances in information technology. Then however, as firms adjusted their expectations about the magnitude and sustainability of potential savings, the use of auctions decreased and more and more hybrid mechanisms, combing features of auctions and negotiations, have become the norm.In this project, we intend to investigate one such hybrid mechanism, the buyerdetermined reverse auction. Here, bidders compete on price like in a standard reverse auction, but the winner is not necessarily the supplier with the lowest bid. Rather, buyers decide, like in a negotiation, based on the final quotes and further information about the suppliers, who will be awarded the contract. Today, these buyerdetermined reverse auctions are very common. Ariba, a major commercial provider of on-line reverse auctions and other sourcing solutions, uses these non-binding auctions almost exclusively.In four subprojects we plan to analyse theoretically, experimentally and with field data, (i) whether dynamic buyer-determined auctions are vulnerable to collusion among suppliers, (ii) in how far this hybrid mechanism supports trust between the buyer and the seller, (iii) the consequences of providing to bidders only the rank of their bid during the auction, and (iv) the extent to which such a mechanism is vulnerable to favouritism, which might be called the downside of social interaction. This project also intends to contribute to the engineering of procurement, in particular on the question on when auctions or negotiations or hybrid mechanisms should be used. We focus on procurement, but note that this topic is also of relevance for selling mechanisms.