Relationship preserving multi-attribute reverse auction: A web-based experimental analysis

Highlights

• We experimentally investigated into the incentive-oriented auctions and bidding assistance.

• .

• Giving additional business as incentive increases supplier participation.

• The buyer gets higher utility in incentive-oriented auctions.

• Providing incentive improves buyer–supplier relationship.

• Bidding assistance to improve supplier utility is found to be ineffective.

Abstract

Repeated use of reverse auction often degrades the buyer–supplier relationship. Theoretical studies show that providing incentive to the losing but competing suppliers can keep them interested to participate in future auctions thereby maintaining a healthy level of competition. We conduct web-based experiments to validate this theoretical observation in multi-attribute reverse auctions. We compare incentive-oriented and standard multi-attribute reverse auctions and demonstrate that the results in the laboratory setting corroborate the theoretical findings. Adopting incentive-oriented mechanism, the buyer is able to provide better utility to suppliers while protecting her own. We conclude that such a mechanism can reduce the negative perception of the suppliers and help build better buyer–supplier relationship in the long run.

Introduction

Multi-attribute reverse auctions that consider non-price attributes such as quality and lead time reduce the risk of getting low quality products at lower price. Organizations can use multi-attribute auctions as an alternative to the two-stage bidding process—prequalification and winner determination. Theories as well as experiments suggest that such auctions generate more utility for the buyer than their price-only counterparts. The multi-attribute auction also helps the suppliers to competitively bid on many non-price attributes other than price (Beall e al., 2003, Strecker, 2003). Buyer gets the product or service at the lowest possible price from a set of suppliers from the supplier base (Losch and Lambert, 2007, Presutti, 2003). In these auctions, the suppliers end up winning with a thin profit margin due to competition. A supplier with the lowest cost structure always wins the auction, which, in turn, demotivates the other suppliers. Therefore, it is not surprising that the buyer-supplier relationship is negatively affected due to its repeated use (Emilani and Stec, 2002, Jap, 2002, Tassabehiji et al., 2006, Wagner and Schwab, 2004). The techniques proposed in the literature to improve buyer–supplier relationship are: (1) subsidies to the losing suppliers (Rothkopf, Harstard, & Fu, 2003), (2) price negotiation after auction (Daly & Nath, 2003), (3) payment to losing suppliers (Daly & Nath, 2003) and (4) awarding business to the continuously losing suppliers (Park et al., 2008, Ray et al., 2011). Rothkopf et al. (2003) have pointed out that subsidizing suppliers need not necessarily leave the buyer worse off in the long run. Therefore, assuring some business to the losing suppliers will encourage them to make auction-specific investments and to participate in the auction in a more efficient way.

It is likely that the suppliers who continuously lose in many auctions may subsequently leave the supplier base. If most of the suppliers decide to stay away from the auction, the competition level may decrease and the obvious benefits of the reverse auction may not be realized. The effect is particularly severe for the products and services with a limited supplier base. The present trend of supplier base rationalization as well as the inherent characteristic of some engineering products or services often results in a supplier base that is substantially small (Sarkar & Mohapatra, 2006). Ray et al. (2011) show that providing incentive to the losing-but-competitive suppliers is a better strategy in retaining them in a limited supplier base scenario. In multi-attribute auctions, David, Azoulay-Schwartz, and Kraus (2006) have observed that the dominant strategy of a supplier is to maximize her profitability by bidding with attributes which can be considered as optimal for a supplier. In reality, it may be difficult for a supplier to precisely determine these values. It requires modeling of the situation, developing a mathematical tool and collecting the right data to determine these values. If an appropriate bidding tool is available to the supplier, they can bid optimally and, in turn, can increase their profitability. We propose that if a tool for generating optimal values is made available then the suppliers can generate additional utility, which we call as indirect incentive—that which the supplier can generate by adopting an improved bidding strategy.

Analytical study of the multi-attribute auction mechanism is inherently complex due to more number of non-price attributes. Bichler (2000) has pointed out that the complexity of the multi-attribute reverse auctions encourages researchers for experimental investigations. Chen-Ritzo, Harrison, Kwasnica, and Thomas (2005) have used gaming experiments to reveal the information behavior and the utility of the buyer in multi-attribute reverse auction. The performance of these auctions is tested conducting experiments in field and laboratory (Bichler, 2000, Haruvy and Katok, 2007, Lucking-Reiley, 1999, Sherstyuk and Dulatre, 2008). For example, Bichler (2000) conducted experiment to test the impact of multi-attribute reverse auction on the utility of the buyer and reported that such auctions generate more utility for the buyer than their price-only counterparts. Most of the laboratory-based experiments conducted in the area of auction are centered on understanding the benefits of the buyer (Bichler, 2000, Chen-Ritzo et al., 2005, Koppius and Heck, 2003). These experiments use buyer utility as a measure, compare different auction formats, and do not show any concern for the suppliers. However, in a limited supplier base, the utility of a supplier is important as the amount of business that a supplier gets reflects her interest in participating in the further auctions. To our knowledge, no laboratory-based experiment has focused on the issue of buyer–supplier relationship.

In this paper, we present a web-based gaming experiment to show the effect of multi-attribute reverse auction on the limited supplier base in a laboratory setting. In the reverse auction literature, the goodness of an auction mechanism is judged in terms of the utilities that the buyer and suppliers receive. The utility in physical terms is a measure of monetary and the non-monetary benefits that an individual gets. We use utility as a proxy to measure the satisfaction level of the subjects participating in the experiments. We assume that a supplier’s cumulative utility is a measure of her interestedness in participating in the auction. In this work, we use experimental study to bridge the gap between theory and practice. The purpose of the experiments is to test the superiority of the incentive-oriented auction mechanism over the standard auctions. At the end of each experiment, we collect feedback from the subjects on the satisfaction level in the fairness of the auction process through a questionnaire. We also consider the information so collected as another source to measure interestedness. The experimental results show that, providing incentive is effective in making the suppliers interested to continue their participation with the buyer.

The paper is organized as follows: We discuss the procurement scenario used in the experiment in Section 2 and auction setting in Section 3. We discuss about the design of the gaming experiment and the gaming environment in Sections 4 Design of the gaming experiment, 5 The design of the gaming environment respectively. In Section 6, we present about the playing of the auction game. We then discuss about the experimental results in Section 7 before concluding the paper.