Multiattribute Procurement Auctions: Efficiency and Social Welfare in Theory and Practice

Gregory E. Kersten ()
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Gregory E. Kersten: InterNeg Research Centre, Concordia University, Montreal, Quebec H3H 01A, Canada

Decision Analysis, 2014, vol. 11, issue 4, 215-232

Abstract: One of the standard assumptions in auction theory is that preferences can be represented with quasilinear utility. This assumption is of particular significance in reverse auctions, which are used in procurement. This paper presents an analysis of quasilinear utilities and their implications. Building on observations of scholars in economics and decision sciences, who note that quasilinear preferences may be rare in practice, the paper shows that in the procurement of goods and services, price is often interrelated with costs. When preferences can be represented with convex or concave utilities, the alternatives in which the buyer's surplus is maximized are different from those that maximize social welfare. The result is that reverse auctions may cause a significant loss of social welfare, which is of particular significance for public organizations. The analysis of concave efficient frontiers in the utility space shows that it is possible to determine deals that yield greater social welfare than the winning bids. If the winning seller is willing to share the increase in utility with the buyer who faces a loss, then these alternatives can produce, for both the buyer and the seller, utility values that are higher than the utility values produced by the winning bid.

Keywords: games/group decisions; bidding-auctions; multiattribute utility theory/functions; quasilinear utility; economics; reverse auctions; social welfare; efficiency (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ordeca:v:11:y:2014:i:4:p:215-232

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