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Motivated by challenges facing IT procurement, this paper studies a hybrid procurement model in which a reverse auction of a fixed-price IT outsourcing contract may be followed by renegotiation to extend the contract's scope. In this model, the buyer balances the needs to incentivize noncontractible vendor investment and to curb the winning vendor's information rent by choosing the initial project scope and the buyer's investment in the quality of the project. We find that a buyer may benefit from inducing ex post renegotiation to motivate vendor investment, especially when the winning vendor has high bargaining power and the quality uncertainty is low. Broadening the initial scope reduces information rent but leaves little room for ex post renegotiation and, hence, discourages vendor investment, whereas increasing the buyer's investment has opposite effects. Interestingly, the two measures can be strategic substitutes or complements depending on the likelihood of the renegotiation and the two parties' bargaining powers. The buyer may strategically set a low initial project scope and high investment to incentivize renegotiation and vendor investment, which may explain why many IT outsourcing projects start small and allow expansions. Our findings also generate several testable predictions for IT outsourcing. This paper was accepted by Kartik Hosanagar, information systems. [ABSTRACT FROM AUTHOR]

When complex procurement projects are conducted, it is often not possible to write complete contracts. As a consequence, the relationship between buyer and supplier is important for the success of the project. In this paper we investigate the claim that auctions in procurement can be detrimental for the buyer–supplier relationship, which is in line with the observation that reverse auctions are less frequently conducted if projects are complex. A poor relationship can result in a decrease in trust on the part of the buyer during the sourcing process and an increase in the supplier's opportunistic behavior following sourcing. We consider a setting in which the winning supplier decides on the level of quality to provide to the buyer, and we compare a standard reverse auction and a buyer-determined reverse auction, both analytically and in the laboratory. We find that the buyer-determined reverse auction can perform better than the standard reverse auction from both the buyer's and the suppliers' perspective. In a buyer-determined reverse auction, it may be optimal for the buyer to select the supplier who submitted a higher bid, which may in turn induce this supplier to deliver higher quality. Standard auctions, however, yield lower prices but reduce cooperation. The degree of trust, as reflected by a larger number of transactions and a higher average efficiency of trade, is significantly higher in buyer-determined reverse auctions. Theoretical reasoning based on other-regarding preferences organizes our data well. This paper was accepted by Serguei Netessine, operations management. [ABSTRACT FROM AUTHOR]

The authors describe a market-based two-stage auction that the FCC, with assistance from researchers from universities and consulting firms, developed. The two-sided auction repurposed 84 MHz of spectrum from conventional over-the-air TV to wireless uses and resulted in reducing the U.S. federal deficit by over $7 billion. In 2017, the U.S. Federal Communications Commission completed the world's first two-sided spectrum auction, reclaiming radio frequency spectrum from television broadcasters to meet exploding demand for mobile broadband, 5G, and other wireless services. Operations research—including a customized series of optimization models, decompositions, cuts, heuristics, large neighborhood searches, and a portfolio of propositional satisfiability solvers whose parameters were determined by machine learning—was essential to the design and implementation of the auction. The auction repurposed 84 megahertz of spectrum and generated gross revenue of nearly $20 billion, providing more than $10 billion in capital for the broadcast television industry and over $7 billion for federal deficit reduction. [ABSTRACT FROM AUTHOR]

In a name-your-own-price (NYOP) auction, consumers bid for a product or service. If a bid exceeds the concealed threshold price, the consumer receives the product at her bid price. This paper examines how to optimize the interactions between the NYOP retailer and service providers, while, at the same time, managing the bid acceptance rates in order to induce the desired consumer bidding behavior. Channel profit is impacted by how the retailer decides whether or not a given consumer bid will be accepted and, if so, which service provider is chosen to supply a unit of the product to the consumer. We devise a mechanism, the modified second-price auction, which maximizes channel profit. This paper was accepted by J. Miguel Villas-Boas, marketing. [ABSTRACT FROM AUTHOR]

Although binding reverse auctions have attracted a good deal of interest in the academic literature, in practice, dynamic nonbinding reverse auctions are the norm in procurement. In those, suppliers submit price quotes and can respond to quotes of their competitors during a live auction event. However, the lowest quote does not necessarily determine the winner. The buyer decides after the contest, taking further supplier information into account, on who will be awarded the contract. We show, both theoretically and empirically, that this bidding format enables suppliers to collude, thus leading to noncompetitive prices. [ABSTRACT FROM AUTHOR]

One of the standard assumptions in auction theory is that preferences can be represented with quasilinear utility. This assumption is of particular significance in reverse auctions, which are used in procurement. This paper presents an analysis of quasilinear utilities and their implications. Building on observations of scholars in economics and decision sciences, who note that quasilinear preferences may be rare in practice, the paper shows that in the procurement of goods and services, price is often interrelated with costs. When preferences can be represented with convex or concave utilities, the alternatives in which the buyer's surplus is maximized are different from those that maximize social welfare. The result is that reverse auctions may cause a significant loss of social welfare, which is of particular significance for public organizations. The analysis of concave efficient frontiers in the utility space shows that it is possible to determine deals that yield greater social welfare than the winning bids. If the winning seller is willing to share the increase in utility with the buyer who faces a loss, then these alternatives can produce, for both the buyer and the seller, utility values that are higher than the utility values produced by the winning bid. [ABSTRACT FROM AUTHOR]

To stay abreast of current supply-market pricing, it is common for procurement managers to frequently organize auctions among a pool of qualified suppliers (the supply base). Sole awards can alienate losing suppliers and cause them to defect from the supply base. To maintain the supply base and thereby control the high costs of finding and qualifying new suppliers, buyers often employ split awards, which in turn inflate purchase costs. This results in a trade-off that we investigate in an infinite-horizon stationary setting in which the relative cost position of each supplier is randomly drawn in every period. We characterize the optimal split award that minimizes long-run costs (purchasing and qualification) and show that maintaining a constant supply-base size--using a “qualify-up-to” policy--s optimal for the buyer. We find that neither the extent of multisourcing nor the buyer’s value of split awards compared with winner-take-all auctions are monotonic in the qualification cost and that split-award auctions can increase ex ante system, buyer, and supplier benefits simultaneously. To our knowledge, this is the first paper studying split-award auctions for supply-base maintenance, and it will hopefully galvanize further research on this important topic. [ABSTRACT FROM AUTHOR]

In this paper, I study profitability of the name-your-own-price channel (NYOP) in the presence of risk-averse buyers. First, I provide conditions that guarantee that for the monopolistic seller the NYOP is more profitable than the posted price. Second, I consider a more competitive framework where buyers with rejected bids have access to an alternative option. I show that if under the posted-price scenario there are unserved customers with low valuations, then NYOP is more profitable than the posted price. Finally, I study whether adding the posted-price option to the NYOP will further increase the seller's profit and show that for the decreasing absolute risk-aversion utility and a monopolistic seller it does not. In the presence of an alternative option, the answer depends on whether buyers consider the posted-price option and the alternative option to be close substitutes or not. Adding the posted-price option will increase the profit in the former case and will not in the latter. [ABSTRACT FROM AUTHOR]

Online reverse auctions generate real-time bidding data that could be used via appropriate statistical estimation to assist the corporate buyer's procurement decision. To this end, we develop a method, called BidAnalyzer, which estimates dynamic bidding models and selects the most appropriate of them. Specifically, we enable model estimation by addressing the problem of partial observability; i.e., only one of N suppliers' bids is realized, and the other (N — 1) bids remain unobserved. To address partial observability, BidAnalyzer estimates the latent price distributions of bidders by applying the Kaiman filtering theory. In addition, BidAnalyzer conducts model selection by applying multiple information criteria. Using empirical data from an automotive parts auction, we illustrate the application of BidAnalyzer by estimating several dynamic bidding models to obtain empirical insights, retaining a model for forecasting, and assessing its predictive performance in out-of- sample. The resulting one-step-ahead price forecast is accurate up to 2.95% median absolute percentage error. Finally, we suggest how BidAnalyzer can serve as a device for price discovery in online reverse auctions. [ABSTRACT FROM AUTHOR]

Reverse auctions are fast becoming the standard for many procurement activities. In the past, the majority of such auctions have been solely price based, but increasingly attributes other than price affect the auction outcome. Specifically, the buyer uses a scoring function to compare bids and the bid with the highest score wins. We investigate two mechanisms commonly used for procurement in business-to-business markets, in a setting in which buyers' welfare is affected by exogenous nonprice attributes such as the quality, service, and past relationships. Under both mechanisms, bidders bid based on price, but in the "buyer-determined" mechanism, the buyer is free to select the bid that maximizes her surplus while in the "price-based" mechanism, the buyer commits to awarding the contract to the low price bidder. We find, both in theory and in the laboratory, that the "buyer-determined" mechanism increases the buyer's welfare only as long as enough suppliers compete. If the number of suppliers is small and the correlation between cost and quality is low, the buyer is better off with the "price-based" mechanism. These findings are intended to help procurement managers make better decisions in designing procurement mechanisms for a variety of settings. [ABSTRACT FROM AUTHOR]

This paper studies a queuing model in which a buyer sources a good or service from a single supplier chosen from a pool of suppliers. The buyer seeks to minimize the sum of her procurement and operating costs, the latter of which depends on the supplier's lead time. The selected supplier can regulate his lead time, but faster lead times are costly. Although the buyer selects the supplier to source from (possibly via an auction) and dictates the contractual terms, the buyer's bargaining power is limited by asymmetric information: The buyer only has an estimate of the suppliers' costs, while the suppliers know their costs precisely. We identify a procurement mechanism that minimizes the buyer's total cost (procurement plus operating). This mechanism is not simple: It is a numerically derived nonlinear menu of contracts. Therefore, we study several simpler mechanisms: e.g., one that charges a late fee and one that specifies a fixed lead-time requirement (no menus, no nonlinear functions). We find that simple mechanisms are nearly optimal (generally within 1% of optimal) because asymmetric information conveys significant protection to the supplier, i.e., the supplier is able to retain most of the benefit of having a lower cost. Renegotiation is another concern with the optimal mechanism: Because it does not minimize the supply chain's cost, the firms can be both better off if they throw away the contract and start over. Interestingly, we find that the potential gain from renegotiation is relatively small with either the optimal or our simple mechanisms. We conclude that our simple mechanisms are quite attractive along all relevant dimensions: buyer's performance, supply chain performance, simplicity, and robustness to renegotiation. [ABSTRACT FROM AUTHOR]

With the advent of the Internet, and the minimal information technology requirements of a trading partner to join an exchange, the number of sellers who can qualify and participate in online exchanges is greatly increased. We model the competition between two sellers with different unit costs and production capacities responding to a buyer demand. The resulting mixed-strategy equilibrium shows that one of the sellers has a normal high price with random sales, while the other seller continuously randomizes its prices. It also brings out the inherent advantages that sellers with lower marginal costs or higher capacities have in joining these exchanges, and provides a theoretical basis for understanding the relative advantages of various types of sellers in such exchanges. [ABSTRACT FROM AUTHOR]

This paper presents an initial examination of an emerging business model, the Name-Your-Own-Price (NYOP) channel, as popularized by priceline.com. Focusing on how to optimally structure such market interactions, I ask whether it is more profitable to restrict individuals to a single bid, as is currently done by Priceline, or conversely, to allow consumers to continue bidding if the previous offer was ejected. I find that both market structures yield the same expected profit. In practice, a single-bid policy may not be perfectly enforceable, especially in the Internet environment, because a sophisticated user can circumvent such a policy by camouflaging one's identity or otherwise manipulating the bidding procedure. Thus, Priceline's single-bid restriction is likely to result in Partial-Repeat-Bidding, the case in which some consumers are limited to a single bid while other, sophisticated users may rebid. I ask whether such surreptitious bidding is detrimental to the NYOP firm and find that profits are lower than if such opportunistic behavior were absent. Surprisingly, I find that the impact of the number of repeat bidders on profits is not monotonic. Thus, if it is prohibitively costly or logistically infeasible for the NYOP firm to eliminate surreptitious rebidding behavior, the firm may in fact, benefit from encouraging, rather than discouraging, users to rebid. The direction that increases profits depends on the percentage of sophisticated bidders. [ABSTRACT FROM AUTHOR]