An Analysis of Scoring and Buyer-Determined Procurement Auctions

Abstract

In procurement auctions the object for sale is a contract, bidders are suppliers, and the bid taker is a buyer. The suppliers bidding for the contract are usually the current supplier (the incumbent) and a group of potential new suppliers (the entrants). Since the buyer has an ongoing relationship with the incumbent, he needs to adjust the bids of the entrants to include non-price attributes, such as the switching costs. The buyer can run a scoring auction, in which suppliers compete on the adjusted bids or scores, or, he can run a buyer-determined auction, in which suppliers compete on the price, and the buyer adjusts a certain number of the bids with the non-price attributes after the auction to determine the winner. Unless the incumbent has a significant cost advantage over the entrants, I find that the buyer should run a scoring auction if the non-price attributes are available. If the non-price attributes are difficult or expensive to obtain, the buyer should run a buyer-determined auction adjusting only the lowest price bid.