Procurement (Reverse) Auctions Where Service Providers have Official Ratings

Abstract

We consider service providers (e.g., contractors) who bid for undertaking a large project — reverse auctions. As there is a risk that the lowest bidder will not be able to complete the project on budget or time, the customer, often a government agency, wishes to incorporate prior information on the bidders reliabilities into the choice of winning bid. We consider the use of official ratings of bidders, which are common knowledge. The customer is assumed to select the bidder for which the ratio of bid to rating is the lowest. A bidder assumes that each other bidder’s bid is the sum of its private value, the ratio of this value to its rating and the inverse of the rating. We characterize the equilibrium bids of two bidders, of [Formula: see text] symmetric bidders and of three nonsymmetric bidders, and provide comparative statics and examples. We also discuss a scenario where all ratings are known only to the customer, and each bidder knows only its own rating.