Combinatorial Procurement Auctions Research Articles

The beauty of Dutch: Ex-post split-award auctions in procurement markets with diseconomies of scale

Abstract Ex-post split-award auctions are frequently organized as combinatorial procurement auctions in which the demand for some quantity to be procured is split into multiple shares and suppliers can bid on individual shares and the package. With two shares the auction selects either a single- or dual-source allocation. Markets with diseconomies of scale make the environment strategically challenging, because suppliers need to coordinate on a split outcome in the efficient equilibrium. We provide an equilibrium analysis of three combinatorial formats, namely, the first-price sealed-bid, the Dutch and the Dutch-FPSB split-award auction. We show that, unlike in single-object auctions, first-price sealed-bid and Dutch combinatorial auction formats are not strategically equivalent. While the FPSB auction exhibits a coordination problem for bidders, the Dutch formats have only efficient equilibria. The price information revealed during the Dutch auction formats helps bidders coordinate. In markets with only two bidders equilibria involving high pooling prices emerge in all three formats. However, no such strategy exists anymore when the number of bidders exceeds the number of shares. As a result, qualifying one more supplier has a significant impact as the expected procurement costs are reduced substantially.

Optimal pricing in iterative flexible combinatorial procurement auctions

Abstract In a combinatorial procurement auction with large demand volumes, bidders can find it challenging to carefully combine, evaluate and price different units of items in a package while at the same time considering their internal capacity and production costs. As opposed to static combinatorial procurement auctions, flexible procurement combinatorial auctions provide the bidders with the ability to reveal their price functions and therefore more efficiently communicate numerous variations of pricing for multiple units of items via concise bids. In this paper we propose a fully expressive bidding language for flexible combinatorial auctions. We define its associated winner determination problem, show that it is NP-hard and propose a Lagrangian-based approach to solve it. Optimal Lagrangian multipliers are used as proxies for auction item prices. The multipliers are also used in formulating the suppliers’ profit maximization problem to find their optimal bid quantities and prices while taking into account various levels of suppliers’ risk-taking attitudes. We analytically show the convergence of the iterative flexible auction. Our numerical experiments show that on average flexible iterative auctions generate lower market prices, require less computational effort and converge faster than their static counterpart. At termination, while the auctioneer secures lower procurement costs in a flexible auction, the total winning-suppliers’ profit slightly reduces due to price reduction in the auction.

A hybrid multi-agent negotiation protocol supporting supplier selection for multiple products with synergy effect

Supplier selection is an important problem in supply chain management. In practice, it is common for a purchasing company to procure a bundle of products simultaneously. In this regard, synergy effect could exist between products and hence affect the final choice of suppliers. It is therefore necessary to incorporate the synergy effect between products in supplier selection process. Agent-based negotiation models are applied to automate supplier selection process. Negotiation protocol is an essential component should be considered when building an effective agent negotiation model. The objective of this research is to propose a negotiation protocol special for multi-product supplier selection problem. The negotiation protocol is a hybrid multi-agent protocol of combinatorial procurement auction protocol and multi-bilateral bargaining protocol. The negotiation protocol is able to support the purchasing company and suppliers negotiate on the concrete commitments of multiple products simultaneously, and select suppliers for multiple products. In addition, both the purchasing company and suppliers can express their preferences on the synergy effect between products in negotiation process by adopting the negotiation protocol. Simulation is conducted to demonstrate the effectiveness and efficiency of the negotiation protocol.

Modeling profit sharing in combinatorial exchanges by network flows

In this paper we study the possibilities of sharing profit in combinatorial procurement auctions and exchanges. Bundles of heterogeneous items are offered by the sellers, and the buyers can then place bundle bids on sets of these items. That way, both sellers and buyers can express synergies between items and avoid the well-known risk of exposure (see, e.g., Cramton, Shoham, & Steinberg, Combinatorial Auctions, 2006). The reassignment of items to participants is known as the Winner Determination Problem (WDP). We propose solving the WDP by using a Set Covering formulation, because profits are potentially higher than with the usual Set Partitioning formulation, and subsidies are unnecessary. The achieved benefit is then to be distributed amongst the participants of the auction, a process which is known as profit sharing. The literature on profit sharing provides various desirable criteria. We focus on three main properties we would like to guarantee: Budget balance, meaning that no more money is distributed than profit was generated, no negative transfers, which guarantees to each player that participation does not lead to a loss, and the core property, which provides every subcoalition with enough money to keep them from separating. We characterize all profit distributions that satisfy these three conditions by a monetary flow network and establish a connection to the famous VCG payment scheme (Clarke in Public Choice 18:19ff, 1971; Groves in Econometrica 41:617–631, 1973; Vickrey in J. Finance 16:8–37, 1961) and the Shapley Value (Shapley in Kuhn & Tucker (Eds.), Contributions to the Theory of Games, vol. II, pp. 307–317, 1953). Finally, we introduce a novel profit sharing scheme based on scaling down VCG discounts using max-min fairness principles to achieve budget balance. It approximates the Shapley Value linearly in the number of bundles and can be computed efficiently.

A Pareto-metaheuristic for a bi-objective winner determination problem in a combinatorial reverse auction

The bi-objective winner determination problem (2WDP-SC) of a combinatorial procurement auction for transport contracts is characterized by a set B of bundle bids, with each bundle bid b∈B consisting of a bidding carrier cb, a bid price pb, and a set τb of transport contracts which is a subset of the set T of tendered transport contracts. Additionally, the transport quality qt,cb is given which is expected to be realized when a transport contract t is executed by a carrier cb. The task of the auctioneer is to find a set X of winning bids (X⊆B), such that each transport contract is part of at least one winning bid, the total procurement costs are minimized, and the total transport quality is maximized. This paper presents a metaheuristic approach for the 2WDP-SC which integrates the greedy randomized adaptive search procedure with a two-stage candidate component selection procedure, large neighborhood search, and self-adaptive parameter setting in order to find a competitive set of non-dominated solutions. The heuristic outperforms all existing approaches. For seven small benchmark instances, the heuristic is the sole approach that finds all Pareto-optimal solutions. For 28 out of 30 large instances, none of the existing approaches is able to compute a solution that dominates a solution found by the proposed heuristic.

Reputation-based winner determination problem for combinatorial transportation procurement auctions

This paper proposes a reputation-based winner determination problem for transportation procurement auctions where the allocation of long-term contracts to carriers is decided with respect to both bid ask-prices and carriers reputation. The objective is to manage the trade-off between transport costs and the quality of service during operations. Carriers reputation is translated into unexpected hidden cost that represents the possible additional cost that the shipper may incur when dealing with a set of winning carriers. This cost depends essentially on the carriers reputation as evaluated by the shipper running the auction. To evaluate carriers reputations, the shipper uses a number of service attributes with different weights depending on shipping contracts.

BIDS AND COSTS IN COMBINATORIAL AND NONCOMBINATORIAL PROCUREMENT AUCTIONS—EVIDENCE FROM PROCUREMENT OF PUBLIC CLEANING CONTRACTS

Combinatorial procurement auctions enable suppliers to pass their potential cost synergies on to the procuring entity and may therefore lead to lower costs and enhance efficiency. However, bidders might find it profitable to inflate their stand‐alone bids in order to favor their package bids. Using data from standard and combinatorial procurement auctions, we find that bids on individual contracts in simultaneous standard auctions without the option to submit package bids are significantly lower than the corresponding stand‐alone bids in combinatorial auctions. Further, no significant difference in procurer's cost as explained by auction format is found. (JEL D44, H57, L15)

Combinatorial auctions in public procurement: Experiences from sweden

Combinatorial procurement auctions are increasingly being employed in the private and public sector as an alternative to simultaneous single contract auctions. This mechanism has the advantage that it enables suppliers to express synergies across bundles of public contracts. This mitigates the exposure problem and also has the potential to both lower the price paid by the procuring authority and to enhance efficiency. This paper provides stylized facts of recently performed combinatorial public procurements in various markets in Sweden.

Do Combinatorial Procurement Auctions Lower Cost? - An Empirical Analysis of Public Procurement of Multiple Contracts

Combinatorial procurement auctions enable suppliers to pass their potential cost synergies on to the procuring entity and may therefore lead to lower costs and enhance efficiency. However, bidders might find it profitable to inflate their stand-alone bids in order to favour their package bids. Using data from standard and combinatorial procurement auctions, we find that bids on individual contracts in simultaneous standard auctions without the option to submit package bids are significantly lower than the corresponding stand-alone bids in combinatorial auctions. Further, no significant difference in procurer’s cost as explained by auction format is found.

A public procurement combinatorial auction mechanism with quality assignment

This article focuses on mechanism design for quality assignment combinatorial procurement auctions. We model how the participants can maximize social surplus, the difference between gross utility and total cost in electronic procurement, while selecting appropriate quality standards for the procured items. In typical forward combinatorial auctions, the goal is to maximize the sum of all buyers' valuations. In our setting, however, to achieve high buyer utility with low supplier cost, the selected quality levels for the procured items from the suppliers must exceed some predetermined minimum threshold. So the identification of capable suppliers and the corresponding quality assignments are crucial, since buyer utility and supplier cost will be affected by the buyer's quality choice. We develop a novel mechanism to balance the interests of buyers and sellers. Our proposed quality assignment Vickrey–Groves–Clarke (QA-VCG) mechanism is incentive-compatible, provides constraints on partial participation, and is efficient in quasi-linear preferences. In consideration of the perspective of the buyer as a government auctioneer, we also propose a revised mechanism to implement the goal of achieving minimal procurement costs, and appropriate benefits for participating suppliers. We provide a numerical illustration of our QA-VCG mechanism, and an extension that addresses an iterative combinatorial auction mechanism design in our context.

Editor's introduction

I am very happy to introduce Issue 9.1 of SIGecom Exchanges. All the contributions in this issue concern markets of various kinds. In "The Pathologies of Online Display Advertising Marketplaces," Edelman discusses various challenges faced by marketplaces for banner ads on websites (in contrast to ads displayed next to search results). In "Designing Aggregation Mechanisms for Reputation Systems in Online Marketplaces," Aperjis and Johari discuss mechanisms for aggregating ratings that a seller has received; they consider mechanisms that average over a fixed window of past transactions (and discuss how to optimize the window size), as well as a broader class of mechanisms. In "Matching, Cardinal Utility, and Social Welfare," Anshelevich and Das discuss matching markets where the participants' preferences are modeled cardinally (whereas they are often modeled ordinally in this type of market). In "Competitive Equilibria in Matching Markets with Budgets," N. Chen, Deng, and Ghosh consider the Shapley-Shubik assignment model (with general utility functions) and extend it with budget constraints; they then study how to compute a competitive equilibrium (if one still exists). In "Connections Between Markets and Learning," Y. Chen and Vaughan discuss the mathematical connections between market maker mechanisms for prediction markets, and no-regret learning, showing that any cost-function-based prediction market with bounded loss can be interpreted as a no-regret learning algorithm, and studying what the resulting no-regret learning algorithms look like. In "Competition in Mechanisms," Pai considers settings with multiple sellers that compete with each other by announcing mechanisms, and discusses some of the key issues as well as recent results. Finally, in "Approximability of Combinatorial Problems with Multi-agent Submodular Cost Functions," Goel, Karande, Tripathi, and Wang consider computational problems that come up in winner determination in combinatorial procurement auctions: a feasible set of elements must be selected, and there are multiple agents that can provide subsets of these elements. They consider the case where each agent has a submodular cost function, and establish upper and lower bounds on the approximability of these problems.

An Analysis of Design Problems in Combinatorial Procurement Auctions

Traditional auction mechanisms support price negotiations on a single item. The Internet allows for the exchange of much more complex offers in real-time. This is one of the reasons for much research on multidimensional auction mechanisms allowing negotiations on multiple items, multiple units, or multiple attributes of an item, as they can be regularly found in procurement. Combinatorial auctions, for example, enable suppliers to submit bids on bundles of items. A number of laboratory experiments has shown high allocative efficiency in markets with economies of scope. For suppliers it is easier to express cost savings due to bundling (e. g., decreased transportation or production costs). This can lead to significant savings in total cost of the procurement manager. Procurement negotiations exhibit a number of particularities: It is often necessary to consider qualitative attributes or volume discounts in bundle bids. These complex bid types have not been sufficiently analyzed. The winner determination problem requires the consideration of a number of additional business constraints, such as limits on the spend on a particular supplier or the number of suppliers. Iterative combinatorial auctions have a number of advantages in practical applications, but they also lead to new problems in the determination of ask prices. In this paper, we will discuss fundamental problems in the design of combinatorial auctions and the particularities of procurement applications.Reprint of an article from WIRTSCHAFTSINFORMATIK 47(2)2005:126–134.

A combinatorial procurement auction featuring bundle price revelation without free-riding

Combinatorial auctions are currently becoming a common practice in industrial procurement, allowing bidders (sellers of goods and services in the procurement setting) to avoid the risk of selling good or service bundles that are incomplete, inefficient, or excessively expensive to deliver. Two major concerns in combinatorial auction design are the revelation or discovery of market price information over the course of the auction, and the inherent computational difficulty ( NP-hardness) of the underlying “winner-determination” problem. In this paper we describe a new general auction format maintaining the benefits of the adaptive user-selection approach without the problems of free-riding, inefficiency, or distortionary linear prices. This auction format is particularly well-suited to the largest combinatorial auctions for which winner-determination is computationally tractable, because it provides bundle synergy information that is computable in polynomial time for all interactive phases.

Simplified Bidding and Solution Methodology for Truckload Procurement and Other Vcg Combinatorial Auctions

In theory, combinatorial auctions can provide significant benefits in many real-world applications, such as truckload procurement. In practice, however, the use of such auc- tions has been greatly limited by the need for bidders to bid on an exponential number of bundles and for the auctioneer to solve an exponentially large winner-determination problem. We address these challenges for VCG combinatorial procurement auctions in which a bidder's cost for each bundle is determined by a cost function with an amenable structure. For example, the cost to a trucking company of servicing a bundle of loads is based on the least-cost set of tours covering all of these loads, which can be found by solving a simple minimum cost flow problem. Leveraging the fact that true-cost bid- ding is a dominant strategy in VCG auctions, we suggest that the bidders' challenges can be overcome by specifying this true-cost function explicitly as a bid, rather than computing and communicating each bid individually. Moreover, we propose to embed this true-cost function directly within the winner-determination problem, using the strength of mathematical programming to solve this problem without ever explicitly enumerating the bids. The research challenge is then to identify this cost function, and formulate and solve the corresponding winner-determination problem. We focus primarily on how this can be done for the truckload procurement problem, outline a more general framework for the approach, and identify a number of other promising

Taking the Lab to the Field: Experimental Tests of Alternative Mechanisms to Procure Multiple Contracts

The first part of the paper reports the results from a sequence of laboratory experiments comparing the bidding behavior for multiple contracts in three different sealed bid auction mechanisms; first-price simultaneous, first-price sequential and first-price combinatorial bidding. The design of the experiment is based on experiences from a public procurement auction of road markings in Sweden. Bidders are asymmetric in their cost functions; some exhibit decreasing average costs of winning more than one contract, whereas other bidders have increasing average cost functions. The combinatorial bidding mechanism is demonstrated to be most efficient. The second part of the paper describes how the lab experiment was followed up by a field test of a combinatorial procurement auction of road markings.

Taking the Lab to the Field: Experimental Tests of Alternative Mechanisms to Procure Multiple Contracts

The first part of the paper reports the results from a sequence of laboratory experiments comparing the bidding behavior for multiple contracts in three different sealed bid auction mechanisms; first-price simultaneous, first-price sequential and first-price combinatorial bidding. The design of the experiment is based on experiences from a public procurement auction of road markings in Sweden. Bidders are asymmetric in their cost functions; some exhibit decreasing average costs of winning more than one contract, whereas other bidders have increasing average cost functions. The combinatorial bidding mechanism is demonstrated to be most efficient. The second part of the paper describes how the lab experiment was followed up by a field test of a combinatorial procurement auction of road markings.