Reverse auction mechanism with punishment and the preset quality interval

Abstract

In reverse auction, if a buyer sets quality standard and punishes the suppliers whose product quality doesn't satisfy the quality standard, the low-quality suppliers will quit the bidding process. This will decrease the bidding competition among suppliers and lead to high procurement cost. In order to make bidding competition fierce, buyers often attract some low quality suppliers to enter the auction. However, it may bring the vicious price competition because secondary low-quality suppliers would have more cost advantages. Those suppliers have lower production costs, which are advantages in the bidding process, and may lead to the failure of the transaction, or even delay the construction period, bring the economy loss to the buyers because their product quality doesn't satisfy standards. In this paper, we study the problem how to maintain quality appropriately and to reduce the transaction price. By establishing the quality preset intervals and setting default payment mechanism to punish the low quality suppliers, we can appropriately select suppliers and expand the suppliers set attracting some sub-suppliers to enter the bidding process. Under this mechanism, suppliers' bidding strategies with the same distribution costs first decrease and then increase in default rate, suppliers with higher default rate will bid lower. In this way, low-quality suppliers with lower default rates and qualified suppliers will have similar strategies, which make the competition fierce. Moreover, buyers can set different quality punishment parameters or change the preset interval to meet the different preferences of purchasing managers.