Score Auction Research Articles

Consequences of model choice in predicting horizontal merger effects

How practitioners model competition influences the predicted effects of a merger. We show how a Bertrand price setting and a second score auction model can be nested within a general bargaining framework. Through numerical simulations, we then show how the predicted merger effects vary with model choice, and that two commonly used strategies for obtaining demand parameters can yield markedly different outcomes across the models. Finally, we show how model and calibration strategy choices affect the magnitude of predicted harm in the 2012 Bazaarvoice/PowerReviews merger.

Technical Note—Bidding in Multidimensional Auctions When the Qualities of All Bidders Matter

Measuring the “True” Quality by Rival Bidder Qualities in Score Auctions In a procurement auction, where price and quality are evaluated by a score, the assessment criteria partially account for the “true” quality offered. The joint information of all the bids can increase the reliability of the measurement process of quality, giving better accuracy of estimation compared with the reported quality. In “Technical Note―Bidding in Multidimensional Auctions When the Qualities of All Bidders Matter,” Lorentziadis examines auctions where the score is adjusted by the qualities of all bidders, who exhibit different production efficiencies and additive separable costs. At equilibrium, the total procurement cost remains the same in the first-score and the second-score auctions. For different adjustments of the score—for example, using a weighted average of all the qualities—we find that the standard unadjusted score auction brings the highest total project cost to the buyer. Procurement managers should give consideration to score rules that account for all bidder qualities.

Mechanism design of incentive-based reverse auctions with loss-averse 3PLs under incomplete attributes.

As a supply chain solution integrator, fourth party logistics (4PL) has become an important focus for improving the operational efficiency of the logistics industry in recent days. This paper addresses the mechanism design problem of the 4PL for selecting a third party logistics (3PL) provider who involves loss-averse behavior to form a longer-term strategic partnership in multi-attribute reverse auctions. Due to fluctuating costs of energy or labor and unintentional delivery failures like traffic jam or technology malfunctions, we consider two incomplete attributes, namely cost uncertainty and delivery risk. Integrating the loss-averse behavior of 3PLs, based on the prospect theory, the bid decision model is constructed to obtain 3PLs’ bidding strategies. The corresponding efficient and optimal scoring auctions that consist of cost-sharing contract and contingent penalty are developed to maximize the ex ante expected profit of the system or the 4PL depending on whether the 4PL is willing to cooperate or not. Theoretical analysis verified by numerical examples illustrates the advantage of the proposed mechanisms. Impacts of model parameters on the 4PL’s decision are also investigated and managerial insights are presented.

Multi-dimensional procurement auction under uncertain and asymmetric information

This paper addresses two important issues in public procurement: ex ante uncertainty about the participating agents’ qualities and costs and their strategic behaviour. We present a novel multi-dimensional auction that incentivises agents to make a partial inquiry into the procured task and to honestly report quality-cost probabilistic estimates based on which the principal can choose the agent that offers the best value for money. The mechanism extends second score auction design to settings where the quality is uncertain and it provides incentives to both collect information and deliver desired qualities.

The Modern Advertising Agency Selection Contest: A Case for Stipends to New Participants

In the modern advertising agency selection contest, each participating agency specifies not only its proposed creative campaign but also the budget required to purchase the agreed-on media. The advertiser selects the agency that offers the best combination of creative quality and media cost, similar to conducting a score auction. To participate in the contest, each agency needs to incur an up-front bid-preparation cost to cover the development of a customized creative campaign. Agency industry literature has called for the advertiser to fully reimburse such costs to all agencies that enter the contest. The authors analyze the optimal stipend policy of an advertiser facing agencies with asymmetric bid-preparation costs, such that the incumbent agency faces a lower bid-preparation cost than a competitor agency entering the contest. The authors show that reimbursing bid-preparation costs in full is never optimal, nor is reimbursing any part of the incumbent's bid-preparation cost. However, a stipend that is strictly lower than the competitor's bid-preparation cost can benefit the advertiser under certain conditions. The authors provide a sufficient condition (in terms of the distribution of agency values to the advertiser) for such a new-business stipend to benefit the advertiser.

Design of Public Procurement Auctions: Evidence from Cleaning Contracts

We compare beauty contests with first-price sealed-bid and scoring auctions, using data on public procurement of cleaning services in Swedish municipalities. The lowest submitted and winning bids are similar in all auction designs despite a higher price sensitivity of procurement bureaucrats in scoring (and first-price) auctions. There is more entry in beauty contests, by firms favored in them. Reduced entry into the scoring and price only auctions largely explains why the procurement costs are not lowered compared to beauty contests.

Information Revelation in Procurement Auctions with Two‐Sided Asymmetric Information

A buyer needs to procure a good from one of two suppliers offering differentiated products and with privately observed costs. The buyer privately observes the own valuations for the products and (ex ante) decides how much of this information should be revealed to suppliers before they play a first score auction. Our main result is that the more significant is each supplier's private information on the own cost, the less information the buyer should reveal. We also examine the buyer's incentives to make untruthful announces.

Short communication: DEA based auctions simulations

In this paper we use simulations to numerically evaluate the Hybrid DEA – Second Score Auction. In a procurement setting, the winner of the Hybrid auction by design receives payment at the most equal to the Second Score auction. It is therefore superior to the traditional Second Score scheme from the point of view of a principal interested in acquiring an item at the minimum price without losing in quality. For a set of parameters we quantify the size of the improvements and show that the improvement depends intimately on the regularity imposed on the underlying cost function. In the least structured case of a variable returns to scale technology, the hybrid auction only improved the outcome for a small percentage of cases. For other technologies with constant returns to scale, the gains are considerably higher and payments are lowered in a large percentage of cases. We also show that the number of the participating agents, the concavity of the principal value functions, and the number of quality dimensions impact the expected payment.

Analysis on Bidding Behavior in Score Auction: Highway BTO Projects

Analysis on Bidding Behavior in Score Auction: Highway BTO Projects

Prizes and lemons: procurement of innovation under imperfect commitment

The literature on R&D contests implicitly assumes that contestants submit their innovation regardless of its value. This ignores a potential adverse selection problem. The present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest. We compare ?xed-prize tournaments with and without entry fees, and optimal scoring auctions with and without minimum score requirement. Our main result is that the optimal ?xed-prize tournament is more pro?table than the optimal auction since preventing bypass is more costly in the optimal auction.

An Analysis of Scoring and Buyer-Determined Procurement Auctions

In procurement auctions the object for sale is a contract, bidders are suppliers, and the bid taker is a buyer. The suppliers bidding for the contract are usually the current supplier (the incumbent) and a group of potential new suppliers (the entrants). Since the buyer has an ongoing relationship with the incumbent, he needs to adjust the bids of the entrants to include non-price attributes, such as the switching costs. The buyer can run a scoring auction, in which suppliers compete on the adjusted bids or scores, or, he can run a buyer-determined auction, in which suppliers compete on the price, and the buyer adjusts a certain number of the bids with the non-price attributes after the auction to determine the winner. Unless the incumbent has a significant cost advantage over the entrants, I find that the buyer should run a scoring auction if the non-price attributes are available. If the non-price attributes are difficult or expensive to obtain, the buyer should run a buyer-determined auction adjusting only the lowest price bid.

Advertising Agency Selection Contest with Partial Reimbursements of Participation Costs

We model the contest among full-service advertising agencies as a score auction. The score auction allows the advertiser to select the agency that offers the best combination of creative quality and media cost, and to determine the contract price. To participate in the contest, each agency needs to incur an upfront bid-preparation cost arising from the development of a customized creative. Industry literature often calls for the advertiser to reimburse such costs to all agencies that enter the contest. e show that reimbursing bid-preparation costs in full is never optimal for the advertiser. However, a partial imbursement of the costs can be profitable under two conditions we find to be necessary: First, a sufficiently large difference must exist between the bid-preparation cost of the incumbent agency currently serving the account and that of a competitor agency wishing to replace it. Second, the population of agencies must not contain too many weak agencies that can only deliver a very small profit to the advertiser.

Ascending Combinatorial Scoring Auctions

In multi-attribute procurement auctions with multiple objects, the auctioneer may care about the interplay of quality attributes that do not belong to the same item -- like each item's delivery time, if all items are needed at once. This can influence the performance of the auction mechanism. We generalize the Ausubel-Milgrom ascending proxy auction to such an environment and show that the main properties still hold: Equilibria in profit-target strategies exist, the final allocation maximizes the surplus and the payoff vector is in the core. Furthermore, the scoring rule used to evaluate the bids may contain valuable information about the auctioneer for his competitors, providing an incentive not to reveal it. In our setting, it is possible to keep the scoring rule secret without changing the outcome of the auction. Additionally, for additive scoring rules a close connection to the original proxy auction exists.

Implementing optimal procurement auctions with exogenous quality

In this paper, we consider the implementation of the optimal procurement auction outcome when there is a trade-off between price and quality for the buyer. The quality proposals of the competing firms are assumed to be exogenous and common knowledge. After defining the optimal auction, we characterize the discriminatory first score auction and the modified second score auction implementing it when the buyer is assumed to have the same information as the firms. Then we consider an auction which requires no specific information from the buyer and show that a second score auction followed by a negotiation stage can implement the optimal auction outcome under this more realistic assumption.

Auctioning Incentive Contracts

This paper draws a remarkably simple bridge between auction theory and incentive theory. It considers the auctioning of an indivisible project among several fi rms. The firms have private information about their future cost at th e bidding stage, and the selected firm ex post invests in cost reduct ion. The authors show that (1) the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid; (2) the winner faces a (linear) incenti ve contract; (3) the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost; and (4) the share of cost overruns borne by the winn er decreases with the winner's announced expected cost. Copyright 1987 by University of Chicago Press.