This Article Full Text (PDF) e-companion Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Google Scholar Articles by Kostamis, D. Articles by Duenyas, I.

Total-Cost Procurement Auctions: Impact of Suppliers' Cost Adjustments on Auction Format Choice

Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599
Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
dimitris_kostamis{at}unc.edu
dbeil{at}umich.edu
duenyas{at}umich.edu

We consider sealed- and open-bid total-cost procurement auctions where two attributes are used for contract award decisions: price, which is bid by the supplier, and a fixed cost adjustment, which is included by the buyer to capture nonprice factors such as logistics costs. Suppliers know only their own true production cost and their own cost adjustment, and the buyer does not know the suppliers' true production costs but does know all suppliers' cost adjustments, which she herself sets in order to make an informed total-cost decision. The buyer, who seeks to minimize her total (price and cost adjustment) procurement cost, can choose to run a first-price sealed-bid auction, where suppliers' bids are affected by their beliefs about each other's total costs, or a descending open-bid auction, where only the actual realizations of suppliers' total costs drive the auction outcome. We characterize the buyer's choice between the two formats as a threshold decision over suppliers' cost adjustments and analyze the effect of supplier beliefs on her decision. We also study the impact of additional suppliers on the buyer's decision, the effect of correlation between suppliers' production costs and their cost adjustments, and additive as well as multiplicative total-cost functions. The results suggest that procurement managers can use their evaluations of suppliers' cost adjustments to make better auction format decisions.

Key Words: procurement auctions; informed buyer; information disclosure
History: Received: November 14, 2006; accepted: February 4, 2009.