Procurement auctions: Improving efficient winning bids through multi-bilateral negotiations

Abstract

Auctions have been used in the procurement of heterogeneous products, produced and delivered after the auctions conclude, as well as services. In these situations the quasi-linearity assumption of the buyer and the sellers is violated and the price and other attributes are interrelated. The relationship between price and other attributes is illustrated here with two exchanges in which the market participants are characterized by Cobb-Douglass production functions. It shown that even in the simplest case, when the contract curve is linear, the price and other attributes are interrelated. This relationship becomes more complex for non-linear contract curves. The paper shows that in these cases the auction does not maximize social welfare, i.e., it is an inefficient mechanism. Furthermore, even if the winning bid is an efficient solution, a winwin solution which dominates this bid may be possible. The buyer needs to engage in multi-bilateral negotiations in order to seek joint-improvements. The purpose of the negotiation is to search for side-payments.