We consider two mechanisms to procure differentiated goods: the
request for quote and an English auction with bidding credits. In the request for
quote, each seller submits a price and the inherent quality of his good. Then the
buyer selects the seller who offers the greatest difference in quality and price. In
the English auction with bidding credits, the buyer assigns a bidding credit to each
seller conditional upon the quality of the seller’s good. Then the sellers compete
in an English auction with the winner receiving the auction price and his bidding
credit. Game theoretic models predict the request for quote is socially efficient
but the English auction with bidding credits is not. The optimal bidding credit
assignment under compensates for quality advantages, creating a market
distortion in which the buyer captures surplus at the expense of the seller’s profit
and social efficiency. In experiments, the request for quote is less efficient than
the English auctions with bidding credits. Moreover, both the buyer and seller
receive more surplus in the English auction with bidding credits.
By: Jason Shachat, J. Todd Swarthout
Published in: RC22587 in 2002
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