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Dual Sourcing with Price Discovery

Jose Alcalde () and Matthias Dahm ()

No 16-1, QM&ET Working Papers from University of Alicante, D. Quantitative Methods and Economic Theory

Abstract: Reverse auctions are considered a fast and inexpensive price discovery tool to award procurement contracts and it is often desirable to award contracts to more than one supplier. We propose a new procurement procedure that is based on a reverse auction. Shares are allocated endogenously, depending on the suppliers’ bids. The procedure obtains dual sourcing by assigning positive shares to the two most competitive bids and uses discarded bids to endogeneize the reserve price. In equilibrium the two most competitive suppliers are awarded contracts. Surprisingly, when discarded suppliers are competitive enough, the procedure not only allows taking advantage of dual sourcing but also generates lower procurement expenditures than a standard auction for sole sourcing. We also show that providers reveal their costs truthfully and that the procurement procedure can be used in different scenarios concerning what providers know about each others’ costs, provided the assumption of private values holds.

Keywords: Dual Sourcing; Procurement Auctions; Contests; Price Discovery (search for similar items in EconPapers)
JEL-codes: D44 D47 (search for similar items in EconPapers)
Date: 2016-03-15
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