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

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.

[1]  Y. Narahari,et al.  Multiattribute electronic procurement using goal programming , 2007, Eur. J. Oper. Res..

[2]  Gregory E. Kersten,et al.  Concession-making in multi-attribute auctions and multi-bilateral negotiations: Theory and experiments , 2013, Electron. Commer. Res. Appl..

[3]  Gregory Lewis,et al.  Procurement Contracting with Time Incentives: Theory and Evidence , 2009 .

[4]  George A. Boyne,et al.  Public and Private Management: What's the Difference? , 2002 .

[5]  Stefan Strecker,et al.  Information revelation in multiattribute English auctions: A laboratory study , 2010, Decis. Support Syst..

[6]  Martin Bichler,et al.  Configurable offers and winner determination in multi-attribute auctions , 2005, Eur. J. Oper. Res..

[7]  Susan Athey,et al.  Information and Competition in U.S. Forest Service Timber Auctions , 2001, Journal of Political Economy.

[8]  Eli M. Snir,et al.  Contractors’ and Agency Decisions and Policy Implications in A+B Bidding , 2015 .

[9]  Tuomas Sandholm.  Expressive Commerce and Its Application to Sourcing: How We Conducted $35 Billion of Generalized Combinatorial Auctions , 2007, AI Mag..

[10]  R. Keeney,et al.  Advances in Decision Analysis: Practical Value Models , 2007 .

[11]  Michael H. Rothkopf,et al.  Decision Analysis: The Right Tool for Auctions , 2007, Decis. Anal..

[12]  Sandra Campo,et al.  Risk aversion and asymmetry in procurement auctions: Identification, estimation and application to construction procurements , 2012 .

[13]  Khaled A El-Rayes,et al.  Time-Cost-Quality Trade-Off Analysis for Highway Construction , 2005 .

[14]  Kenneth F. Reinschmidt,et al.  Effects of Contractors’ Risk Attitude on Competition in Construction , 2011 .

[15]  Murat Köksalan,et al.  An interactive approach for multi-attribute auctions , 2011, Decis. Support Syst..

[16]  David C. Parkes,et al.  Models for Iterative Multiattribute Procurement Auctions , 2005, Manag. Sci..

[17]  Jay Simon,et al.  A Multiattribute Sealed-Bid Procurement Auction with Multiple Budgets for Government Vendor Selection , 2011, Decis. Anal..

[18]  Kholekile L. Gwebu.  Decision Support in Multi-Attribute Reverse Auctions , 2009 .

[19]  Pallab Sanyal,et al.  Competitive bidding for health insurance contracts: lessons from the online HMO auctions , 2012, International Journal of Health Care Finance and Economics.

[20]  Jeffrey E. Teich,et al.  NegotiAuction: An experimental study , 2013, Decis. Support Syst..

[21]  Alok Gupta,et al.  Effect of Information Feedback on the Outcomes and Dynamics of Multisourcing Multiattribute Procurement Auctions , 2012, J. Manag. Inf. Syst..

[22]  Terry P. Harrison,et al.  Better, Faster, Cheaper: An Experimental Analysis of a Multiattribute Reverse Auction Mechanism with Restricted Information Feedback , 2005, Manag. Sci..

[23]  R. L. Keeney,et al.  Decisions with Multiple Objectives: Preferences and Value Trade-Offs , 1977, IEEE Transactions on Systems, Man, and Cybernetics.

[24]  Lawrence M. Ausubel,et al.  The Lovely but Lonely Vickrey Auction , 2004 .

[25]  Mark Klein,et al.  Auctions and bidding: A guide for computer scientists , 2011, CSUR.

[26]  Gregory E. Kersten,et al.  Rational agents, contract curves, and inefficient compromises , 1998, IEEE Trans. Syst. Man Cybern. Part A.

[27]  H. Varian,et al.  When Do Market Games Have Transferable Utility , 1985 .

[28]  Jyrki Wallenius,et al.  A multi-attribute e-auction mechanism for procurement: Theoretical foundations , 2006, Eur. J. Oper. Res..

[29]  F. Branco.  The Design of Multidimensional Auctions , 1997 .

[30]  K. Gerdes,et al.  Quality Guidelines for Energy System Studies: Cost Estimation Methodology for NETL Assessments of Power Plant Performance , 2011 .

[31]  D. Parkes,et al.  Auctions, Bidding and Exchange Design , 2004 .

[32]  Paul R. Milgrom,et al.  Matching with Contracts , 2005 .

[33]  Jeryl L. Mumpower,et al.  The judgement policies of negotiators and the structure of negotiation problems , 1991 .

[34]  Richard E. Plank,et al.  Total Cost of Ownership Models: An Exploratory Study , 2002 .

[35]  Martin Bichler,et al.  Industrial Procurement Auctions , 2005 .

[36]  Howard Raiffa,et al.  Games and Decisions: Introduction and Critical Survey. , 1958 .

[37]  Martin Bichler,et al.  Software frameworks for advanced procurement auction markets , 2006, CACM.

[38]  Mark A Walker,et al.  On the Generic Nonoptimality of Dominant-Strategy Allocation Mechanisms: A General Theorem That Includes Pure Exchange Economies , 1990 .

[39]  Sarit Kraus,et al.  Bidding in sealed-bid and English multi-attribute auctions , 2006, Decis. Support Syst..

[40]  Yeon-Koo Che.  Design competition through multidimensional auctions , 1993 .

[41]  John Asker,et al.  Properties of Scoring Auctions , 2004 .

[42]  H. Raiffa,et al.  Negotiation Analysis: The Science and Art of Collaborative Decision Making , 2003 .

[43]  L. Wein,et al.  An Inverse-Optimization-Based Auction Mechanism to Support a Multi-Attribute Rfq Process , 2001 .

[44]  Ho Soo Lee,et al.  Special Issue: 2002 Franz Edelman Award for Achievement in Operations Research and the Management Sciences: Combinatorial and Quantity-Discount Procurement Auctions Benefit Mars, Incorporated and Its Suppliers , 2003, Interfaces.

[45]  Yoav Shoham,et al.  Combinatorial Auctions , 2005, Encyclopedia of Wireless Networks.

[46]  Daniel Vanderpooten,et al.  A unified framework for multiple criteria auction mechanisms , 2008, Web Intell. Agent Syst..