Theoretical and Laboratory Investigation of Buyer-Determined Procurement Auctions

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Buyer-determined procurement auctions are now widely used by businesses as a way to purchases needed supplies and parts from other businesses. These 'B-to-B' auctions are conducted on-line by a number of commercial auction providers. They typically use auction rules that economists would classify as non-binding reverse auctions. Bidders compete against each other (hence it is a reverse auction) but the winner is not necessarily the supplier with the lowest bid. Rather, buyers decide who wins the contract, based on the final quotes and further information on the suppliers.While these auctions are widely used, they have not been studied by economists. This award funds the development of a formal game-theoretic model of behavior in these auctions as well as a series of lab experiments that test the theory's predictions about the effects of specific features of the auction design on auction outcomes.This research advances our understanding of a procurement methods that is in wide use. The results of this research benefit businesses as well as government entitities that use procurement auctions to find appropriate suppliers. The research demonstrates that specific changes in auction methods can improve the efficiency of the auction method, so that buyers can quickly locate the supplier who best meets their needs.