Market Design in Procurement

The talk gives a brief introduction to the field of market design and its application to procurement. To illustrate potential applications a particular research article is introduced in more detail. In this article, we compare two commonly used mechanisms in public procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer’s preferences and may collude with one of the sellers. We provide a general characterization of both mechanisms based on public scrutiny requirements and show - contrary to conventional wisdom - that an intransparent negotiation always yields higher social surplus than a transparent auction. Moreover, there exists a lower bound on the number of sellers such that the negotiation also generates a higher buyer surplus. The talk concludes by outlining the future research agenda.