A Comparison of Buyer-Determined and Price-Based Multiattribute Mechanism

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.