Procurement Mechanisms with Post-Auction Pre-Award Cost-reduction Investigations 2022-05-12

Subject:Procurement Mechanisms with Post-Auction Pre-Award Cost-reduction Investigations

Guest:Chen Qi,  Assistant Professor, London Business School (LBS) 

HostCao Yufeng, Assistant Professor, ACEM-SJTU

TimeWednesday, May 11, 2022, 15:00-16:30

Venue: Tencent Meeting

(Please send email to by 13:00 May. 11th for meeting number and password.)


A buyer seeking to outsource production may be able to find ways to reduce a potential supplier's cost, e.g., by suggesting improvements to the supplier's proposed production methods. We study how a buyer could use such “cost-reduction investigations" by proposing a three-step supplier selection mechanism: First, each of several potential suppliers submits a price bid for a contract. Second, for each potential supplier, the buyer can exert an effort to see if she can identify how the supplier could reduce his cost to perform the contract; the understanding is that if savings are found, they are passed on to the buyer if the supplier is awarded the contract. Third, the buyer awards the contract to whichever supplier has the lowest updated bid (the supplier's initial bid price minus any cost-reduction the buyer was able to identify for that supplier). For this proposed process, we characterize how the buyer's decision on which suppliers to investigate cost reductions for in step 2 is affected by the aggressiveness of the suppliers' bids in step 1. We show that even if the buyer does not share the cost savings she identifies in step 2, ex ante symmetric suppliers are actually better off (ex ante) in our proposed mechanism than in a setting without such cost-reduction investigations, resulting in a win-win for the buyer and suppliers. When suppliers' cost and cost-reduction distributions become very heterogeneous, the win-win situation may no longer hold, but every supplier still has an incentive to allow the buyer to investigate him in step 2 because it increases his chance of winning the contract. Using an optimal mechanism analysis, our numerical studies show that our proposed Bid-Investigate-Award mechanism helps the buyer achieve near-optimal performance, despite its simplicity.

Guest Bio:

Qi (George) Chen is an Assistant Professor of Management Science and Operations at London Business School. He earned his doctoral degree from the Stephen M. Ross School of Business at the University of Michigan, and his bachelor degree from the Department of Automation at Tsinghua University. Prior to joining LBS, he has taught at the University of Texas at Dallas. His primary research interests include revenue management and pricing, supply chain management and strategic sourcing, and online marketplaces.