A Sequential Auction-Bargaining Procurement Model

Abstract

One of the most important decisions that a firm faces in managing its supply chain is a procurement decision: selecting suitable suppliers among many potential competing sellers and reducing the purchase cost. While both auctions and bargaining have been extensively studied in the literature, the research that combines auctions and bargaining is limited. In this article, we consider a combined auction-bargaining model in a setting where a single buyer procures an indivisible good from one of many competing sellers. The procurement model that we analyze is a sequential model consisting of the auction phase followed by the bargaining phase. In the auction phase, the sellers submit bids, and the seller with the lowest bid is selected as the winning bidder. In the bargaining phase, the buyer audits the cost of the winning seller and then negotiates with him to determine the final price. For this auction-bargaining model, we find a symmetric equilibrium bidding strategy for the sellers in a closed form, which is simple to understand and closely related to the classical results in the auction and bargaining literature. We also show that the auction-bargaining model generates at least as much profit to the buyer as the standard auction or sequential bargaining model. (C) 2009 Wiley Periodicals, Inc. Naval Research Logistics 57: 13-32, 2010