Gabriel Weintraub, Stanford University
Gabriel Weintraub, Stanford University
TOM Seminar: Procurement Mechanisms for Assortments of Differentiated Products: Theory and Applications
TOM Seminar: Procurement Mechanisms for Assortments of Differentiated Products: Theory and Applications
Abstract:
We consider the problem faced by a procurement agency that runs a mechanism to construct an assortment of differentiated products with posted prices, from which heterogeneous consumers buy their most preferred alternative. Procurement mechanisms used by large organizations, including Framework Agreements (FAs) that are widely used in the public sector, often take this form. When choosing the assortment, the procurement agency must optimize the trade-off between offering a richer menu of products for consumers versus offering less variety, hoping to engage the suppliers in more aggressive price competition. In this talk, we discuss a three-phase project on this type of mechanisms. First, we formulate the problem faced by the procurement agency as a mechanism design problem incorporating the realistic features that allocations are decentralized (i.e., consumers choose what to buy) and that payments must be implemented through linear pricing (in particular, no up-front payments are allowed). We characterize the optimal buying mechanism, which typically restricts the entry of close-substitute products to the assortment to increase competition without much damage to variety. Second, we leverage our characterization of the optimal mechanism to study the design of simpler first-price auction mechanisms that are commonly used in public settings. These results shed light on simple ways to improve them. The Chilean government acquires US\$2 billion in goods and services per year using FAs. Third, we discuss how our results informed a re-design of FAs run by the Chilean government that was implemented in the food FA, one of the largest FAs in Chile. The new FA auction prices decreased by around 25% (in real terms) on average compared to the previous food FA auction that was run before the re-design several years ago.
(joint work with Daniela Saban, Je-ok Choi, Marcelo Olivares, and Eduardo Lara)