Comparing Auction Formats

Abstract

In many procurement settings a buyer uses auction as a price finding and allocation mechanism. This is convenient because the costs often vary across providers and are unknown to the buyer (are private). In such situation an auction may be used to minimize price a buyer has to pay. On the other hand a buyer often cares about other characteristics of service in addition to price. For example, a buyer may care about the overall level of quality (providers' expertise and diligence). Historically, several ways of addressing such concerns have been developed by procurement markets. In US public procurement, potential providers undergo certification process which ensures satisfactory level of quality for those providers who are allowed to participate in auction. After that the provider is chosen through a standard auction mechanism (a first price or a second-price auction). In contrast, private industry prefers to use so called multi-attribute auctions where a buyer has an opportunity to form an impression about the quality of providers who decided to participate in the auction and and may subsequently freely choose among participants according to his private preference for the combination of quality and price. In this paper we compare performance of these two classes of mechanisms.

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