The next Economics Seminar of Paris-Saclay will take place on Thursday, September 22 from 12h15 to 13h15. Nicolas Fugger (University of Cologne) will present Split-Award Auctions and Supply Disruptions (joint with Ulrich Laitenberger).
We consider a buyer who conducts a procurement auction to award a contract to one or more suppliers that specifies a price at which she can buy from these suppliers. Suppliers might fail to deliver. If contract suppliers fail to deliver, the buyer tries to source from non-contract suppliers but has little bargaining power due to time pressure.
The mitigation of supply risks plays an important role in procurement practice but attracted little attention in the academic analysis of procurement auctions. Academic research on multi-sourcing procurement auction typically analyzes these auctions as stand-alone events. In contrast, we consider the influence of the auction design on the post-auction market structure.
First, we show increasing the number of contracts does not only reduce the supply risk but also induces more aggressive bidding. The increase makes the post-auction market more competitive such that being a non-contract supplier becomes less attractive.
Second, if suppliers are heterogeneous regarding their disruption probabilities, less reliable suppliers bid more aggressively than their more reliable competitors causing an adverse selection problem. We show that attracting an additional supplier might lower the buyer’s expected profit. However, we also show how the buyer can adjust the auction design to benefit from an entrant.