On Winners and Losers in Procurement Auctions

The use of auctions in procurement results in price reduction as well as the reduction in the cost and the time required to complete transactions. In many situations, price-only auctions resulted in the violation of the contracts or even contractors' bankruptcies. This is one reason for the introduction of multi-attribute auctions as well as auctions-followed-by negotiations. Auction theory is based on two assumptions which assure that auctions are efficient mechanisms, guarantee efficient solutions, and produce the best possible results for bid-takers. In practice these assumptions are often violated. The contribution of this paper is to propose a procedure for auctions-followed-by negotiations which retains important auction features such as process transparency and efficiency while allowing for increased social welfare. The unique feature of the procedure is the introduction of the win-win phase in which the market participants may attempt to make joint improvements to efficient solutions obtained from auctions.