Collaborative Research: Procurement Mechanism Design

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This grant provides funding for the analytical and experimental work required to better understand a class of procurement mechanism that combine auctions with non-competitive contracts. These mechanisms are widely used in practice because they offer a promise to preserve the advantages that auctions offer (transparency, competitive price) while allowing the buyers to retain control over the identities of their ultimate suppliers, and maintain longer term relationships with those suppliers. But theoretical and practical characteristics of these mechanisms are not well-understood. Mechanisms in which buyers and suppliers can choose between auctions and non-competitive contracts will be formally modeled and analyzed. The theoretical properties of these mechanisms will be examined both in simple settings, as well as in settings with synergies and multi-attribute products. Laboratory experiments involving human subjects and real monetary incentives will be used to validate the analytical results. The laboratory setting will be designed to implement theoretical assumptions and achieve a high level of internal validity, while at the same time the supply-chain procurement context will be used in order to achieve a measure of external validity. Some key experimental treatments will be replicated using participants with managerial expertise in the area of procurement and sourcing.If successful, the results of this research will lead to improvements in the design of procurement mechanisms within supply chains, as well as to a better understanding of theoretical and practical attributes of mechanisms that combine auctions and non-competitive contracts. The primary goal of this work is to provide recommendations on how procurement mechanisms can be improved to enhance gains from trade in complex environments. The research will also provide a better understanding of competitive bidding in environments with synergies and complex multi-attribute products, which is an issue of importance to commercial and government institutions throughout society. The software and experimental protocols will be available for use to other researchers. The proposed work will contribute to the development of infrastructure used to teach issues in procurement and market design to students at all levels.