The performance of reverse auctions versus request for quotes when procuring goods with quality differences

Abstract

The use of dynamic auctions is a major component in many enterprises' e-procurement initiatives. In the case where suppliers offer goods and services of inherently different quality the traditional mechanism has been the request for quote. In a request for quote, suppliers submit a sealed bid and the fixed quality of their offering and then the buyer selects the seller who offers the greatest difference between quality and price. The winning seller receives a price equal to his submitted bid. The reverse auction has immerged as the most commonly adopted dynamic auction for this setting. In a reverse auction, suppliers first submit the qualities of their goods and then the suppliers participate in an auction with the same message space as an open outcry English auction (descending because this is a procurement auction.) However, the auction is only used to set each suppliers price. The last price a supplier submits in the auction becomes their actual submitted price. After, the auction the buyer selects the winning seller who offers the greatest difference between quality and actual submitted price. We provide a game theoretic analysis of both mechanisms. We also provide extensive experimental evaluation of the two mechanisms as wellReverse Auction, Request for Quote, procurement