Multidimensional bidding and negotiation in supplier selection

Abstract

This thesis focuses on supplier selection problems where the supplier is selected based on multiple attributes rather than price only, and at least one side (buyer or supplier) has some private information that the other side does not know. Several different situations of supplier selection are modelled, equilibrium behaviors in each situation are characterized, and the effects of private information on decision making and firm profitability are examined. The first situation (presented in Chapter 3) is when a set of suppliers with asymmetric costs bid on price and non-price attributes (e.g., quality variables) in a scoring auction to win an indivisible contract from the buyer. Only one supplier will be selected. Two types of uncertainty (i.e., uncertainty on scores and uncertainty on weights) are modelled from the suppliers' perspective. The equilibrium decisions of the buyer and the suppliers are characterized, and the effect of uncertainty on the equilibrium outcome is also examined. The investigation of this situation contributes to an understanding of how the suppliers should compete on multiple attributes under uncertainty about the buyer's preferences, as well as how much information the buyer should reveal under different types of supply market (i.e., more homogeneous or heterogeneous).The second situation (presented in Chapter 4) occurs when a buyer and a supplier negotiate over the price and the quality of an object. Only the supplier makes offers, and the buyer decides whether to accept or reject. Two-sided private information is modelled, and the equilibrium behaviour is characterized. On the supplier side, the supplier has private cost information; on the buyer side, the buyer either has private information about the value of an offer to the buyer, or has private information about how important quality (i.e., the weight given to quality) is to the buyer. The equilibrium behaviors are also compared with those in a situation where only price is negotiated over. The findings shed light on the role of private information as well as the supplier's signalling behaviors. The third situation (presented in Chapter 5) relates to an A+B+I/D bidding process where a set of pre-qualified contractors compete on price and construction duration to win a construction contract from the buyer/owner. The A and B components are the price and construction duration, respectively, based on which the buyer selects the winning contractor. The I/D component represents the incentive for early completion or penalty for delay, which occurs in the end when the actual construction time is compared with the bid of construction duration. From the contractors' perspective, they not only have uncertainty about how the buyer evaluates them (i.e., score or weight), but they also have uncertainty about the actual cost of construction. The equilibrium behaviors are characterized, and the way in which the buyer should set the penalty and incentives is also examined.