Optimal Procurement When Both Price and Quality Matter

Estelle Cantillon and John Asker

No 5276, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Optimal auction; Multi-attribute auction; Differentiated product; Multidimensional screening; Scoring auction; Negotiation; Bargaining; Procurement (search for similar items in EconPapers)
JEL-codes: C78 D44 D82 L22 L24 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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