Beyond Dynamic Pricing: Dynamic Product Configuration with Auction/Negotiation Mechanisms

Abstract Reverse auctions are one of the standard exchange mechanisms used in procurement. In many situations heterogeneous products and services that are auctioned require multi-attribute auctions. Often these goods are produced and delivered by the winning bidder after the conclusion of the auction. In such cases the price and other attributes are interrelated. This means that the key assumption of auction theory that the buyers and the sellers have quasi-linear utilities does not hold. The relationship between the price and other attributes is illustrated here with a simple exchange in which the buyer's utility is linear and the sellers’ utilities are Cobb-Douglass production functions with increasing returns to scale. Even in this case, the contract curve is a convex function so the auction does not maximize social welfare. This means that a reverse auction is an inefficient mechanism. Moreover, efficient winning bids can be improved in cases when side-payments are possible. The decrease in the buyer's utility when another efficient solution is selected may be offset by the seller's side-payment. The search for such an alternative and side-payments requires that the buyer and the sellers engage in post-auction negotiations.