Reverse auction mechanism design with quality preference

Abstract

Procurement is an important topic in most enterprises. Comparing with the traditional purchase, reverse auction has been proved more economical, efficient and beneficial for supplier management. An appropriate reverse auction mechanism can be designed for specific situation. In this paper, we design a multi-attribute reverse auction mechanism for a sourcing problem from multiple suppliers under uncertain demand with quality preference, such as purchasing drugs, components for aerospace construction, etc. However, it is very cost and time-consuming to get the quality information of each product and sometimes impossible to get it. Hence the quality information is general a private information. How to get the products with high quality and reasonable price is an important problem faced by managers. We focus on this problem and design a two-stage reverse auction mechanism. From the perspective of buyer, we consider both quality and price, and aims at obtaining supplier's asymmetric private information about the relationship bid price and quality. Then we have proved that the final bid not only maximize the buyer's utility but also make supplier profitable which means this mechanism is efficient. In order to simulate this mechanism and get more conclusions, we take drugs purchase as a numerical analysis example. As a result, we show that the more the bidders are, the more favorable outcome the buyer can obtain. Furthermore, some managerial insights are obtained.