Incomplete Contracts in Multi-period Procurement

We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. We distinguish between complete contracts conditioning on all future realizations of the state of the world and incomplete contracts renegotiated whenever the state of the world changes. We provide conditions such that incomplete contracting does not pose a problem. If the changing state of the world is publicly observable and the buyer cannot switch between suppliers during the lifetime of the project, the buyer achieves the same surplus irrespective of whether contracts are complete or incomplete. An English auction followed by renegotiation whenever the state of the world changes is optimal. To identify conditions when buyers should consider drafting complete contracts, we extend the analysis by considering private information about the changing state of the world and supplier switching. In both cases, incomplete contracting poses a problem. In a survey of procurement consultants, we confirm that publicly observable states of the world via price indexes play an important role in procurement. Moreover, the consultants confirm that supplier switching is infrequent in procurement practice. Thus, incomplete contracting is less of a problem in a considerable share of procurement projects. However, complete contracts are useful and could be used more often. This paper was accepted by Yan Chen, behavioral economics and decision analysis.

Opportunistic behavior in public bidding of agricultural products in IFSULDEMINAS - Campus Inconfidentes

abstract: This study is based on the theory of transaction costs (TCT) to analyze the opportunistic behavior of suppliers in public purchases of agricultural products provided by the private sector. We argue that among the public purchasing modalities, the electronic auction, although using the principles of the reverse English auction and considered as a market structure governance driven by price, presents opportunistic behavior at the time of bidding by the seller, until the closing of the contract with the buyer. We analyzed the differences in price quotations and the closing price of 20 agricultural products purchased in electronic auction of public bidding processes in comparison to the bid prices and of references between the years 2014 to 2017 in the Federal Institute Sul de Minas - Campus Inconfidentes. The results show that there was a discount in the biddings between the years 2014 and 2017, since the repetition of bids in electronic auction forced the reduction of prices by the suppliers. However, it was possible to note opportunism by some agents, in the items in which the public agency under study did not fully specify the bidding product.

Channel Auctions

Standard auction formats feature either an upper bound on the equilibrium price that descends over time (as in the Dutch auction) or a lower bound on the equilibrium price that ascends over time (as in the English auction). We show that in some settings with costly information acquisition, auctions featuring both (viz., a narrowing channel of prices) outperform the standard formats. This Channel auction preserves some of benefits of both the English (truthful revelation) and Dutch (security for necessary information acquisition) auctions. Natural applications include housing, online auction sites like eBay, recording transactions on blockchains, and spectrum rights. This paper was accepted by Joshua Gans, business strategy.

The Role of Supplier Quality in e-Procurement Negotiation

<p><strong>Purpose:</strong> The purpose of this study is to examine the significance and the role of supplier rating as a formalised supplier quality measure to achieve better- negotiated prices and to identify price premium resulting from improved rating.</p><p><strong>Methodology/Approach:</strong> Data from real B2B environment of electronic reverse auction SW solution ProeBiz were obtained and processed. Data from the reverse rating approach were used where the default rating value is 1 and improvements of rating lead to decreasing the rating value. Except standard descriptive statistics, non-parametric correlation and Kruskal-Wallis tests, the knowledge discovery techniques by decision trees CHAID algorithm were used.</p><p><strong>Findings:</strong> From our empirical research results, there is the evidence of a significant positive relation of supplier quality or rating improvements on a negotiated price for suppliers. Improving rating from the default value (1.00) to (0.98-0.95) can lead to better- negotiated prices for suppliers in English auction expressed as price premium in the value of 4%.</p><p><strong>Research Limitation/implication:</strong> Research has several limitations, esp. in the size of the sample and sectorial view as the research is based on data from construction, electro-mechanics and logistics sector.</p><strong>Originality/Value of paper:</strong> The paper is original and not published in other publications.

Selling to Advised Buyers

In many cases, buyers are not informed about their valuations and rely on experts, who are informed but biased for overbidding. We study auction design when selling to such “advised buyers.” We show that a canonical dynamic auction, the English auction, has a natural equilibrium that outperforms standard static auctions in expected revenues and allocative efficiency. The ability to communicate as the auction proceeds allows for more informative communication and gives advisors the ability to persuade buyers into overbidding. The same outcome is the unique equilibrium of the English auction when bidders can commit to contracts with their advisors. (JEL D44, D82, D83, D86)

An Auction Approach for Cost and Schedule Management of IT Outsourcing Project

Cost and schedule management are important issues in an information technology outsourcing project. Generally, a client does not know much about market quotation and ability of vendors. Thus, an efficient approach should select a suitable vendor for the project with balanced cost and schedule. In this study, an improved standard English auction (ISEA) is designed, in which the multi-attribute situation is considered, and multi-attribute utility theory (MAUT) is introduced. A new auction protocol and a utility increment function are proposed, respectively. Finally, numerical examples are designed to demonstrate the auction process and its operation. Some insights are found: The ISEA is competent to describe the cost and schedule management process in an auction approach. The optimal incremental utility for client and vendor are found, and the proposed auction protocol is a mechanism for the client and vendor to obtain win–win results. The completely consistent results can be obtained from different size cases, which indicates that the validity of the designed auction mechanism and the effect of the utility increase function on the negotiation results.