Applying Auction Theory to Procurement Auctions – An Empirical Study Among German Corporations

Abstract

The recent renaissance of internet and web based businesses for consumers raises the question whether there are similar prospects for b-2-b e-business solutions. At the end of the 1990s online reverse auctions were proposed as a powerful tool to improve the performance of corporate procurement. However, as many of the promises of the e-Business world failed to materialize the issue received only little attention during the last years. Hence, it is not known what kind of role reverse auctions play and what kind of auction designs are used in practice. For this reason, the following article tries to answer three questions regarding the actual use of auctions in corporate procurement:

• 1 To what extend will reverse auctions replace traditional sourcing negotiations within B2B procurement?

• 1 Which auction forms and auction designs are most appropriate for procurement auctions to ensure satisfactory results?

• 1 Are the recently developed complex auction forms, especially combinatorial and multiattribute auctions applied for business procurement?

The study is based on an empirical survey among companies listed at the German stock market in the DAX, MDAX and SDAX indices. The results show that reverse auctions are mainly used by large corporations and only to a very limited extend by smaller companies. Interestingly companies mainly use different variations of the English Auction such as Rank Auctions or Best/Not Best Auctions, which have not been studied by auction and game theorists so far. Auction formats recommended by auction theorists such as Hybrid or Dutch Auctions are hardly used in practice. Among the more complex auction designs Multiattribute Auctions are used much more frequently. Combinatorial Auctions, instead, are not used to often, despite their attractive properties for the procurement of goods with potential synergies in production costs.