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The main aim of this paper is to review some of the newest and most promising advances in auction theory with an eye to applications to procurement practice. Here we focus in particular on four topics related to multidimensional auctions: 1) how to define a proper scoring rule when the awarding bodies lack the necessary information regarding its own preferences and suppliers’ technology; 2) how to cope with the information disclosure policy regarding the discretional evaluation of some aspects of each contractual proposal; 3) how to use contractors’ reputations based on their past performance in the awarding process; 4) how to control the risk of collusion and corruption in the awarding phase.

The purpose of this paper is to analyze how local and central authorities choose between lowest price and more complex scoring rules when they design supplier-selection mechanisms for public procurements. Five hypotheses are tested: a high level of cost uncertainty and highly non-verifiable quality makes the use of the lowest-price supplier-selection method less likely. Organizational habits and transaction-cost considerations influence the choice of mechanism. Strong quality concerns make complex rules more likely.

The analysis departures from normative theory (rational choice) and is based on the regression analysis and survey data comprising a gross sample of 40 contracting authorities and detailed information about 651 procurements.

More complex scoring rules are used more often when the authority is uncertain about costs and about delivered quality. Authority effects are also found to directly and indirectly influence the choice of supplier-selection method, suggesting that tendering design is partly driven by local habits and institutional inertia.

The authors argue that, from a normative point of view, lowest price is an adequate method when the degree of uncertainty is low, for example, because the procured products are standardized and since quality can be verified. When there is significant cost uncertainty, it is better to use the so-called economically most advantageous tender (EMAT) method. (Preferably this should be done by assigning monetary values to different quality levels.) If there is significant uncertainty concerning delivered quality, the contracting authority should retain a degree of discretion, so as to be able to reward good-quality performance in observable but non-verifiable quality dimensions; options to extend the contract and subjective assessments of quality are two possibilities. The main findings are that EMAT and more complex scoring rules are used more often when the contracting authorities report that they experience substantial uncertainty concerning delivered quality and actual costs and that these factors tend to decrease the weight given to price, in line with the predictions. However, the authors also find that this result is mainly driven by variations between authorities, rather than by between-products variation for the same authority. This is from a training of professionals and regulation perspective of policy relevance.

Contract allocation based on habits rather than rational ground could implicate the waste of resources (tax payers money) as it adventures the matching of the preferences of the public sector (the objective, subject matter, of the procurement) and what the potential supplier offers in its tender.

Although the principles for supplier selection are regulated by law they give the contracting authority substantial freedom in designing the scoring rule and in choosing what quality criteria to use. The tension between different objectives and the more general question whether the choices made by authorities reflect rational decision making or institutional inertia together motivate the current study. While the design of the supplier-selection mechanism is an important consideration in procurement practice, it has attracted relatively little attention from the academic community.

This paper presents a procurement auction format structured so as to reconcile supply-side costs with demand-side value through the alignment of bidder and bid-taker interests. The existence of a dominant bidding strategy ensures this alignment and, at the same time, discourages strategic bidding. The format also involves minimal revelation of bidder information, making it attractive to bidders who expect continued participation in the same market. Another major goal of this paper is to engage policymakers through a discussion of important issues, which were brought forth in the course of designing and analyzing the aforementioned auction, that relate generally to the successful execution of procurement auctions.

This chapter develops a structural framework for the analysis of scoring procurement auctions where bidder’s quality and bid are taken into account. With exogenous quality, the authors characterize the optimal mechanism whether the buyer is private or public and show that the optimal scoring rule need not be linear in the bid. The model primitives include the buyer benefit function, the bidders’ cost inefficiencies distribution and cost function, and potentially the cost of public funds. We show that the model primitives are nonparametrically identified under mild functional assumptions from the buyer’s choice, firms’ bids and qualities. The authors then develop a multistep kernel-based procedure to estimate the model primitives and provide their convergence rates. Our identification and estimation results are general as they apply to other scoring rules including quasi-linear ones.

We show how institutional and procedural characteristics affect the final price in public procurement. In order to obtain comparable unit prices, our analysis examined public procurement of homogeneous goods only. We examined two Czech commodity markets: electricity and natural gas, which enabled us to use a private market price as a benchmark metric. The regression analysis is based on the standard ordinary least squares method. On a dataset of 277 tenders, we found that the final unit price of the procurement is sensitive to movements in both commodity market price and price estimated ex ante by the procurer. Moreover, we identified that the final price is reduced when the procurer uses an open procedure, an electronic auction, or attracts more competitors.

Supplier selection is a complex and strategic activity needed in every organization, involving many stakeholders and different attributes as price, delivery performance, and product quality. Globalization, in the last decades, increased the competitiveness between vendors, enhancing the use of decision models to support the best choice based on optimizations and bidding variations due to specific needs. This chapter presents three models of multi-dimensional auctions to improve an international humanitarian NGO process procurement efficiency by reducing procurement costs and the decision-making process time. These models have the advantage to be easily implementable in typically complex environments where there is a large number of categories, suppliers, and other features.

The first proposed model uses combinatorial auctions and is suited for procurement, where suppliers can benefit from cost complementarity. The second one uses volume discount auctions and is suited for volumetric purchases, where discounts for large quantities are common. The third one is a multi-attribute model, which computes the best possible solution considering several criteria and can be used in case of complex purchases that involve various categories and trade-offs and are subject to spot prices.

Several design considerations for this type of auctions are reviewed, as well as the mathematical formulation to determine the best alternative (i.e., winner) that can be solved using simple tools like Microsoft Excel. The models are optimized by a mixed-integer programming, and the multi-attribute one is developed using multi-criteria decision analysis (MCDA). All three models developed in this research showed superior results compared to the baseline, being between 9% and 20% more efficient than a regular supplier selection (singly choosing the lowest price) and improving the bidding compliance.

Reverse e‐auctions are increasingly being used in business‐to‐business procurement and have been reported to yield significant price reductions for buyer firms. However, the adoption of online auction formats has raised many concerns among suppliers, often being criticized for damaging supplier‐buyer relationships and for being antithetical to what is currently regarded as good supply chain management. Against this background this paper aims to examine the reverse auction phenomenon in the UK packaging sector.

Data were collected from the direct experiences of one large food‐packaging supplier, using case studies of reverse e‐auctions, and from exploratory interviews with other suppliers in the sector.

While buyers are reaping significant short‐term price reductions, the benefits to suppliers are less obvious. In fact, little reference was detected to the often‐quoted reductions in overall transaction costs for either buyers or suppliers. However, most respondents were not able to specify their transaction costs and associated risks and did not appear to have adequate costing systems to enable such quantification.

Reports the concerns of suppliers, outlines how buyers could embed trust‐building mechanisms into the reverse e‐auction process and proposes a model for testing the findings in future research.

Expands on the existing experience of the impact of reverse e‐auctions on supply chain relationships despite the limited, albeit growing, body of empirical evidence of this.

In public-private partnership (PPP) contracts of water utilities, of particular concern is lack of market competition. This paper focuses on the size of contracts. If governments design a large-scale transaction, economies of scale in service operation can be expected, but competition in auctions may be compromised. For small contracts many firms will apply, but at the cost of scale diseconomies in operation. The estimated cost function of PPP water utilities indicates that economies of scale exist but diminish quickly as production increases. There is no rationale for more than 300 million cubic meters of water service concessions under a single package, taking a risk of little competition. Conversely, less than 50 million cubic meters of concessions are too small; the bundling approach is required.

This study analyzes small-sized asset owners’ optimal choice problems in selecting an outsourced chief investment officer (OCIO). While large-sized asset owners can select OCIOs through procurement auctions, it is difficult for small-sized asset owners to use this method. Instead, they access OCIO services by participating in an investment pool or utilizing OCIO funds. In this study, the authors compare the two OCIO selection methods. The authors construct an agent-based model for OCIO selection to reflect the heterogeneity in production efficiency and preferences. The results of this study imply that when the market has enough investment pools, the utility of all small-sized asset owners increases. To enhance the growth in the OCIO market, the investment pool should represent the preferences of small-sized asset owners and enable individual owners to find an appropriate OCIO.