A Procurement Auction Model Under Supplier Uncertainty

29 Pages Posted: 18 Aug 2008

See all articles by Haresh Gurnani

Haresh Gurnani

Stony Brook University; Wake Forest University School of Business

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre

Date Written: June 2003

Abstract

As business-to-business commerce shifts to the Internet, newer suppliers with cheaper but unreliable technologies enter the market place to win orders from firms by beating the price of their perfectly reliable (but expensive) competitors. The dilemma facing purchasing firms is the allocation of the tender across suppliers of varying supply reliability. We model the procurement problem as a sealed-bid auction where the buyer has to allocate purchases between an expensive but reliable supplier and a cheaper but unreliable supplier, and the suppliers specify prices for different proportions of the tender awarded to them. A unique feature of our model is that it allows the purchasing firm to reserve the right to change the size of the total tender awarded depending on the nature of the bids received from the suppliers. We prove that the set of Nash equilibrium outcomes coincides with the set of efficient outcomes, and for strictly convex cost functions, the outcome is unique. Further, we show that the possibility of implicit supplier collusion is strengthened in that the suppliers may structure their bids forcing the buyer to allocate the tender resulting in the worst-case (highest price) scenario for him. We also show that the Anton-Yao (A-Y, 1989) model can be interpreted as a limiting case of our model and that the efficient outcome derived in this paper is the only robust outcome in the A-Y model.

JEL Classification: D21, D44, L10

Suggested Citation

Gurnani, Haresh and Ray, Tridip, A Procurement Auction Model Under Supplier Uncertainty (June 2003). Available at SSRN: https://ssrn.com/abstract=1230942 or http://dx.doi.org/10.2139/ssrn.1230942

Haresh Gurnani

Stony Brook University ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

Wake Forest University School of Business ( email )

2601 Wake Forest Road
Winston-Salem, NC 27109
United States

HOME PAGE: http://business.wfu.edu/directory/haresh-gurnani/ Haresh Gurnani

Tridip Ray (Contact Author)

Indian Statistical Institute, New Delhi - Delhi Centre ( email )

7 S .J. S.
Sansanwal Marg
New Delhi, 110016
India

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