An Empirical Analysis of Price, Quality, and Incumbency in Procurement Auctions

Abstract

The use of multiattribute auctions for procurement of products and services when both price and quality matter is becoming more frequent. Such auctions often employ scoring rules and are open ended in winner determination. Yet there is a significant gap in the literature on the efficiency of these procurement mechanisms. In this paper, providing a theoretical model and utilizing data from legal service procurement auctions, we study how open-ended scoring auctions can be used effectively in procurement and demonstrate the roles supplier quality and incumbency play in this process. We demonstrate that open-ended auctions can generate substantial savings to a buyer without compromising quality. We study the underlying mechanism and show how the auction format can work to achieve such performance. We find that the buyer's revealed preferences significantly differ from her stated preferences. Finally, we contribute to the understanding of the role of incumbency in procurement auctions by providing evidence that what may be perceived as incumbency bias can in fact be a revelation of preference for quality.