Daniela Saban

 

Faculty Speaker Daniela Saban [Columbia University]
Title Procurement Mechanisms for Differentiated Products
Date & Time Thursday, March 5, 2015 at 10:30am
Place UCLA Anderson School of Management 
Room D-307

 

Abstract
We consider the problem faced by a procurement agency that runs an auction-type mechanism to construct a menu (assortment of products with posted prices), from a set of differentiated products offered by strategic suppliers. Heterogeneous consumers then buy their most preferred alternative from the menu as needed. Framework agreements (FAs), widely used in the public sector, take this form; the central government runs the initial auction and then the public organizations (hospitals, schools, etc.) buy from the selected assortment as required. This type of mechanism is also relevant in other contexts, such as the design of medical formularies and group buying. When evaluating the bids, the procurement agency must consider the optimal tradeoff between offering a richer menu of products for consumers versus offering less variety, hoping to engage the suppliers in a more aggressive price competition. We develop a mechanism design approach to study this problem, and provide a characterization of the optimal menus. The optimal mechanism balances the tradeoff between product variety and price competition, in terms of suppliers' costs, products' characteristics, and consumers' characteristics. We then use the optimal mechanism as a benchmark to evaluate the performance of the Chilean government procurement agency's current implementation of FAs, used to acquire US$2 billion worth of goods per year. We show how simple modifications to the current mechanism, which increase price competition among close substitutes, can considerably improve performance.

Daniela Saban