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European Journal of Operational Research

journal homepage: www.elsevier.com/locate/ejor

Decision Support

Buyer’s optimal information revelation strategy in procurement

auctions
Cheng Qian a,∗, Edward Anderson b
a
Central University of Finance and Economics, Beijing, China
b
The University of Sydney Business School, Australia

a r t i c l e i n f o a b s t r a c t

Article history: We consider a procurement auction where the buying firm can manipulate the distribution of the uncer-
Received 19 September 2018 tainty facing competing suppliers via reducing subjectivity in the scoring rule announced before the auc-
Accepted 26 November 2019
tion, and we examine the optimal choice of information revelation for the buyer. Specifically, we model
Available online xxx
a multi-attribute scoring auction in which the suppliers submit bids involving both price and non-price
Keywords: attributes and the buyer selects one supplier according to a weighted scoring system. Although the scor-
Auction/bidding ing rule is preannounced and the buyer commits to it during the bid evaluation, it contains elements
Scoring auction that are subjective in nature and not precisely defined, so the suppliers still do not have full information
Multi-attribute bids about the exact score that will be awarded. It may be possible for the buyer to reduce the subjective
Information revelation component in the scoring rule by giving unusually detailed descriptions of what corresponds to specific
scores. We demonstrate that it is beneficial for the buyer to limit the information revealed by retaining
some subjective or imprecisely defined components in the announced scoring rule, so that the suppliers
continue to be uncertain about their final scores. It is also shown that the buyer can gain more from this
type of imprecision (i.e., releasing less information) if the suppliers are more different in terms of their
costs to achieve a given quality level or other aspects of utility for the buyer. We consider both sealed
bid and open auction formats.
© 2019 Elsevier B.V. All rights reserved.

1. Introduction
Procurement auctions are common for supplier selection in
many industries around the world. Although price-only auctions
are still used, multi-attribute auctions play an important role in
the procurement context, where the buyer evaluates the potential
suppliers on a set of attributes, such as price, delivery, reliabil-
ity, etc. In practice, prior to the auction process, the buyer usually
sends a ‘bid document’ to a number of potential suppliers (possi-
bly after a pre-qualification stage to determine this set of compa-
nies), specifying the basic requirements, selection criteria, bid eval-
uation method, etc., and asks them to submit their bids based on a
set of attributes of the item (Pham, Teich, Wallenius, & Wallenius,
2015).
Although there exist a variety of multi-objective decision mak-
ing approaches that can aid the process of supplier evaluation
and selection, in practice the most common decision method for
the buyer is to score the supplier on multiple criteria and then
∗
Corresponding author.
E-mail addresses: qiancheng@cufe.edu.cn (C. Qian),
edward.anderson@sydney.edu.au (E. Anderson).
combine these scores using linear weights (Ho, Xu, & Dey, 2010).
If the buyer is to use such a weighted-point scoring rule for sup-
plier evaluation and winner selection, then a complete description
of the auction usually involves a list of performance attributes, a
weight associated with each attribute, and a scale that determines
the score awarded to each supplier within each attribute; the at-
tribute scores are then added up using the predetermined weights
and this final score is used to find an overall winner (Tunca, Wu, &
Zhong, 2014). A good example is General Electric’s legal services
sourcing, where GE’s Commercial Finance (GECF) division holds
multi-attribute procurement auctions to select legal firms through
a weighted-point scoring rule. Prior to the auction, the procure-
ment committee of GE announces the evaluation attributes (e.g.,
expertise, efficiency, capacity, etc.), their weights, scoring method
and the method to combine these for a final score (Tunca et al.,
2014). A similar approach was also used by Chrysler (Trent and
Robert, 2007, p. 60).
Once the buyer announces the weighted-scoring rule as the bid
evaluation method, it might be assumed that the suppliers, when
making their bid decisions, can calculate the precise scores that
will be awarded by the buyer. However in practice the buyer’s
scoring rule usually contains elements that are subjective in

https://doi.org/10.1016/j.ejor.2019.11.061
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Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
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2 C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx
nature, making it impossible for the suppliers to calculate a pre-
cise score for a specific bid. Even in cases where there exist strict
requirements for explicit disclosure of the bid evaluation method,
the scores of some exogenous quality attributes (e.g., reliability,
firm size, etc.) may still involve a mixture of objective and subjec-
tive assessments. For instance, suppose the buyer states in advance
that a supplier’s reliability will be scored using a 0–10 scale, with
8–10 scores for ‘excellent’, 5–7 for ‘good’, 2–4 for ‘average’, and 0–
1 for ‘poor’. Then there is a subjective assessment required on the
category that a supplier belongs to and the score within that cat-
egory. In practice, the majority of subjective factors are assessed
by assigning a score through agreement of the buyer’s bid evalua-
tion committee. On many occasions, individual members may form
their views (on e.g., reliability of a supplier) based on their own
experience and idiosyncratic assessments. When individuals dis-
agree then there may be discussion that exposes the reason why
one committee member favours e.g., 5/10 for reliability whereas
another proposes 7/10. Thus, the suppliers still have uncertainty
on the scores for their bids even though the scoring rule was an-
nounced by the buyer prior to bidding.
In this example, if it was desired to construct a scoring rule
for reliability that could be estimated accurately by the supplier,
it would be necessary for the buyer’s bid evaluation committee to
meet in advance of disclosing the scoring rule and determine the
factors that will go together into overall score of the ‘supplier’s re-
liability’ and how they are to be assessed and combined. This is a
time consuming process and may involve resolving disagreements
repeatedly. For example, if it is determined that the ‘strength of
the management team’ is to be scored, then discussion might be
around whether ‘average years’ experience in the industry’ and
‘number of similar projects successfully delivered’ are sufficient to
capture this. And if so, more discussion is needed to determine
how these two factors should be weighted and the specific roles
that constitute the management team. The absence of specific sup-
plier bids to anchor the discussion will make this process harder.
Hence, it is often costly for the buyer to reveal explicit informa-
tion on bid evaluation by reducing the subjective components in
the announced scoring rule.
However, there is also motivation for the buyer to increase the
explicit component of the scoring rules, even if this is costly. As
we will show, reducing the subjectivity in the scoring rule will
generally increase the competitiveness of the auction process and
this intensified competition will increase the expected value of the
buyer’s surplus, although it is not optimal for the buyer to elimi-
nate all subjectivity. Given two competing forces at work, a natural
question is when the buyer effort devoted to removing subjectivity
in the scoring rule will, or will not, make the buyer better off. We
will focus on a typical multi-attribute scoring auction in the pri-
vate sector and consider the decision to be made by the buyer on
the amount of subjectivity to retain in the scoring rule announced
before bidding. The buyer revealing more information can be seen
as exerting more efforts (costly) to reduce subjective components
in the scoring rule and thereby producing a very detailed set of
guidelines for bid evaluation, whereas the buyer revealing less in-
formation corresponds to a more standard description as currently
occurs in RFQs. In practice, the buyer actively influencing the auc-
tion outcome through the pre-bid specification of the decision rule
or buyer preference is the usual behavior. Gretschko and Wambach
(2016) have shown examples where the specification of the buyer’s
decision rule can be “manipulated” in procurement auctions in
both public and private sectors. Also, Stoll and Zöttl (2017) show
that a popular European auction platform benefitted from conceal-
ing buyer’s non-price preferences.
In a typical multi-attribute procurement auction, before the
auction starts, the buyer announces a weighted-scoring rule as the
bid evaluation method (but will not know the suppliers’ scores
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
[m5G;December 17, 2019;18:59]
until the bids have been received and evaluated). Given the scoring
rule, the suppliers bid on the price and non-price attributes un-
der uncertainty on the scores. After receiving the bids, the buyer
uses the announced scoring rule to evaluate the bids on a num-
ber of characteristics and then forms an overall score from a linear
weighting of these.
Note that we do not consider the possibility that the buyer re-
veals one scoring rule but uses a different one for bid evaluation
(see Tunca et al. (2014) for analysis of this case). Instead, we as-
sume that the buyer commits to the announced scoring rule, and
we focus on how the buyer’s choice of components in the scoring
rule and the degree to which they can be objectively assessed by
the suppliers, makes a difference to the bid decisions and expected
profits on both sides in equilibrium. The subjectivity that the buyer
retains in defining the scoring rule is reflected as the uncertainty
suppliers face on how their bids will be assessed, which will then
determine the suppliers’ bids and consequently the results of the
auction for the buyer. Our main research question is to determine
the extent to which the buyer should work to make every compo-
nent of the scoring rule explicit, rather than retaining some sub-
jectivity, and we describe this as the buyer’s optimal information
revelation strategy.
We consider a single-item single-unit private-value procure-
ment auction, so that we do not consider any later negotiations
with the winning bidder. This is a good model of many private
sector procurement auctions, especially for firms which commit to
fairness, anti-corruption, and building supplier relationships. For
instance, with a well-maintained supplier pool, Shell mainly uses
competitive bidding for product and service procurement in China,
usually with no post-bid negotiations. Similarly, Boeing states that
it relies heavily on competitive bidding when selecting suppli-
ers and emphasizes the importance of competitive bidding as
“good business practice” (Suppliers, 2019). Although many firms
are tempted to use post-bid negotiations for better offers, there
could be legal restrictions or it could lead to damage to supplier
relationships (MacIsaac, 2011).
We analyze the equilibrium decisions for suppliers in compe-
tition with each other, when each supplier needs to choose price
and non-price values in their bids. We are able to give a detailed
analysis in the case with just two suppliers. If the buyer reveals
more information (by making the scoring rule more explicit and
less subjective) prior to the suppliers making bids, then this will
generally increase the competitiveness of the bidding, leading to
lower expected profits for the suppliers and a more favorable out-
come for the buyer. However, we find that the buyer should not
choose to reveal all the information on bid evaluation even if there
is no cost to make the scoring rule explicit.
These results are obtained for two different auction types: a
sealed-bid auction and an open-bid auction. In the open-bid auc-
tion setting we require fewer assumptions on what the suppliers
know about each other. Our findings contribute to the effective de-
sign of scoring rules, specially in private sector procurement auc-
tions, by helping to determine how explicit the buyer should make
the scoring rule.
In the next section we review the literature that is relevant
to our study, before introducing the model in Section 3. We give
details on the supplier bidding behavior in Section 4, including a
discussion of the equilibrium in bids that occurs. In Section 5 we
show how to use these results to determine, from a buyer’s per-
spective, the optimal amount of uncertainty faced by the suppliers.
This is done in terms of a base-line distribution of the errors that is
then scaled by a single parameter. We relax the assumption of the
suppliers knowing each others’ costs in Section 6. In Section 7 we
turn to an analysis of an open bidding framework in which two
players take turns in making an optimal bid in response to the bid
of the other.
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2. Literature review
We consider a partial information revelation policy in an auc-
tion setting. There is a huge literature on information revelation in
auction theory going back to the affiliated values work of Milgrom
and Weber (1982). However, the great majority of this literature is
concerned with information revelation that will help a bidder es-
timate the value of an item. For a procurement auction this corre-
sponds to information about the costs for a bidder. In our model
costs are known, and information is only about how one bid is
compared to another by the buyer. So in our discussion of the
literature we will concentrate on multi-attribute scoring auctions
where these considerations are a factor.
The design of a multi-attribute scoring auction usually includes
strategic considerations for both auction rules and scoring rules. In
an early study of two-attribute (price and quality) scoring auctions,
Che (1993) compares the performance of three auctions rules: (a)
first-score such that the supplier with the highest score wins and
their offer is finalized as the contract, or (b) second-score where
the supplier with the highest score wins and is required to match
the highest rejected score in the final contract, and (c) second-
preferred-offer which is the same as a second-score auction except
that the winning firm has to match not only the score but also the
exact quality offered by the highest losing supplier. He discusses
the optimal scoring rule to implement the optimal auction mecha-
nism. In this single-round bidding model, two symmetric suppli-
ers have private information about quality costs with an identi-
cally and independently distributed cost parameter. Beil and Wein
(2003) relax these assumptions, and design a multi-round open-
ascending scoring auction, where the buyer’s utility can be maxi-
mized by changing the scoring rule strategically in each round.
Although the majority of research in this area (see also
Engelbrecht-Wiggans, Haruvy, & Katok, 2007) assumes one-
dimensional private information at the suppliers’ side (e.g., suppli-
ers’ quality cost), there are also scoring auction models in which
suppliers have multi-dimensional private information. For instance,
Asker and Cantillon (2010) model a price-quality scoring auction
where the suppliers have private information about their fixed cost
and variable cost. While this research focuses on the buyer’s opti-
mal mechanism in a scoring auction, other researchers focus on
the suppliers’ optimal bidding strategies in multi-attribute scoring
auctions. For example, in an A+B scoring auction for transportation
procurement, Gupta, Snir, and Chen (2015) consider the contrac-
tors’ optimal bids of cost and time to deliver, when the contractors
have private cost information but are uncertain about the comple-
tion time.
It is noteworthy that this group of papers all consider infor-
mation transmission from the bidders to the buyer. In contrast,
there is research on multi-attribute scoring auctions that considers
a buyer with private information on her preferences, so that the
auction also involves information transmission from the buyer to
the bidders. Kostamis, Beil, and Duenyas (2009) examine a scoring
auction where the buyer has different quality adjustments for each
supplier and reveals this truthfully to each supplier privately, and
the suppliers have private information on their own production
costs; the supplier bids on price and the buyer seeks to minimize
the total cost, i.e., price and cost adjustment. They compare the
buyer’s performance between a sealed-bid auction and an open-bid
auction. Following a similar line, Santamaría (2015) models a set-
ting where the buyer has private information on the adjustments
of all suppliers’ non-price attributes, and compares an open-bid
scoring auction, in which each supplier enters a bid of price and
the non-price attributes are added to it so that the overall scores
are adjusted and shown to the suppliers in real time, with a buyer-
determined auction, in which suppliers compete on price and after
the auction the buyer adjusts the bids to determine the winner.
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
[m5G;December 17, 2019;18:59]
3
Stoll and Zöttl (2017) investigate the impact of the buyer conceal-
ing the preference information on non-price attributes available to
the bidders in an open auction setting, and show that the buy-
ers’ concealment of non-price information leads to an increase in
buyers’ surplus, especially when bidders’ non-price characteristics
strongly influence buyers’ decisions. Although these models con-
sider the buyer’s information revelation to the suppliers, they do
not allow the buyer to make a decision on information disclosure.
Research that is more closely related to our paper includes
models of multi-attribute scoring auctions that explicitly investi-
gate the buyer’s information disclosure decisions. Gal-Or, Gal-Or,
and Dukes (2007) consider a scoring auction where each supplier’s
score depends on the price bid and the supplier’s degree of fit with
the buyer’s needs. They show that if the buyer has private informa-
tion about each supplier’s degree of fit, then it is beneficial for the
buyer to share this information with the supplier, since this inten-
sifies price competition. Similarly, Rezende (2009) studies a scoring
auction where the buyer has private information about her biases
toward the bidders. It is shown that in the optimal auction, the
buyer should commit to biasing the choice toward the preferred
supplier, but the bias should be less than the true perceived dif-
ference in value. Colucci, Doni, and Valori (2012, 2015) extend this
research by introducing heterogeneity in suppliers’ costs, finding
that the buyer is better off concealing information if there is suffi-
cient cost difference between suppliers.
The effect of the buyer’s information revelation in multi-
attribute scoring auctions has also drawn the attention of exper-
imental researchers. A number of studies have shown in an ex-
perimental setting that information provided to the bidders may
have a positive impact on the buyer’s utility, bidders’ profits,
auction efficiency and Pareto-optimality (Gwebu, Hu, & Shanker,
2012). In particular, Chen-Ritzo, Harrison, Kwasnica, and Thomas
(2005) show that releasing information about marginal improve-
ments in the bids yields higher utilities for the buyer, since the
information alerts the bidders on how they can improve on pre-
vious bids. Haruvy and Katok (2013) investigate open-bid scor-
ing auctions under two cases for bidder quality transparency: bid-
der qualities are either publicly known or privately known by the
buyer, and show that the buyer’s surplus can be higher when the
information on bidder qualities are private. In contrast, Strecker
(2010) shows that (the buyer) revealing information on the scoring
rule does not seem to benefit the buyer, and the additional profits
for the suppliers are only weakly significant.
Our model in this study differs from those mentioned above,
in terms of the information structure and the buyer’s decision.
When modelling the supplier’s uncertainty on the buyer’s valua-
tion/preference, the majority of research assumes that at the time
when the buyer makes a decision on information revelation, the
buyer and the bidders have the same knowledge: they do not
know the exact amount of the valuation, but know its distribution.
On the other hand some models assume that the buyer knows the
exact quantity of the valuation before making a decision on infor-
mation revelation, whilst the suppliers only know its distribution.
The common feature of these models is that the distribution of the
supplier’s uncertainty is assumed to be exogenously given.
In contrast, we assume that the buyer will determine the dis-
tribution of the supplier’s uncertainty. In essence we consider that
there is uncertainty (or noise) in the prediction that a supplier
makes on the valuation of his bid and the buyer can control the
scale of this uncertainty by changing its distribution. As we dis-
cussed in the introduction, this information structure is motivated
by the process of multi-attribute scoring auctions observed in prac-
tice. While the majority of research considers the binary decision
by the buyer to either reveal or conceal information, we consider
the situation where, prior to bidding, the buyer selects the extent
to which information is revealed, thus the buyer can choose an
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optimal information revelation strategy from a continuum of
strategies.
3. The model
We consider a situation in which a buyer has to select one
amongst n alternative suppliers (indexed by i) via competitive bid-
ding, where each supplier makes a single sealed bid consisting
of a price y and the levels for a set of m non-price (or quality)
attributes Z1 , Z2 , . . . , Zm . These are endogenous attributes and the
cost for supplier i to achieve a level zik for attribute k is given by
cik (zik ). For example, early delivery will be preferred by the buyer
but is more expensive for the supplier, which is typical of endoge-
nous quality variables. We assume that the cost of endogenous
quality is strictly convex, i.e., cik  (z ) > 0, c (z ) > 0, which is not
ik ik ik
only consistent with previous models on multi-attribute procure-
ment auctions (Beil & Wein, 2003; Corato, Dosi, & Moretto, 2018;
Papakonstantinou & Bogetoft, 2017) and other situations (Atasu &
Souza, 2013; Gupta et al., 2015; Voros, 2019), but also consistent
with the practice of quality cost. For instance, it is more expen-
sive for DHL to send packages and parcels (to the same region)
more quickly; as the delivery time is improved, it becomes increas-
ingly costly for DHL to make further improvement in delivery time
(DHL, 2019). Further, this assumption is also supported by the re-
search on the evaluation of cost of quality, which has empirically
shown that the cost of quality is comprised of a convex increasing
conformance cost and a convex decreasing non-conformance cost
(Farooq, Kirchain, Novoa, & Araujo, 2017; Schiffauerova & Thom-
son, 2006). Note that in the context of procurement auctions,
the suppliers are usually pre-qualified (for conformance), in the
sense that their costs of quality (for the bid) should be domi-
nated by the conformance cost (rather than the non-conformance
cost). Thus, the cost of quality should be convex increasing in our
model.
In addition, there are exogenous non-price attributes that also
appear in the evaluation scheme, such as the reliability of the sup-
plier (on the basis of reputation or previous business dealings), or
the quality of the management team, where there is no action that
will improve a supplier’s score. We assume that the buyer has a
separable utility function, in which the quality variables are nor-
malised so that the buyer utility from the bid (yi , zi1 , zi2 , . . . , zim )

is given by Ri + m k=1 zik − yi , where Ri , unknown to the suppli-
ers throughout the auction process, captures the buyer’s utility of
supplier i’s exogenous qualities. The base utility from the good or
service can be incorporated into the variable Ri as well. Also, this
model can represent a situation where bids include specific qual-
ity attributes qik in some context specific measure (such as errors
per million items) which are converted into a score Sk (qik ), with a
weight β k applied to this score in order to determine the overall
score from the bid, where the weights are chosen so that the qual-
ity variables can be directly compared with the price yi (in this
case we have zik = βk Sk (qik )).
Before the buyer announces a scoring rule, the bid evaluation
committee meet to determine the buyer utility function that is not
usually clearly defined in advance. The final decision on the fac-
tors to consider and the extent to which these are to be assessed
by some combination of objective measures is complex. We wish
to abstract from this decision the aspect that directly concerns the
extent to which subjective components remain in the mix, which
will lead to uncertainty by suppliers in how their bids will be as-
sessed.
We choose to do this by capturing the consequence of the
buyer’s decision as the variance of the error term in the signal
that a supplier receives in relation to the Ri value. Suppose each
supplier i has available a signal R  and the buyer’s evaluation R
i i

is given from Ri = Ri + εi so that ε i is the error in the signal. We
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
[m5G;December 17, 2019;18:59]
assume that each error ε i is independently and identically dis-
tributed with a variance σ 2 . Different choices as to the explicitness
in the scoring rule will have different implications for the variance
of the error term; a more explicit scoring rule implies scaling down
the variance of ε i . For simplicity we model this as though the buy-
ing firm is directly choosing the size of σ . The choice made by the
buying firm may have some cost (denoted by CB (σ )), with greater
precision in the signal requiring more costly effort before the auc-
tion takes place, i.e., CB (σ ) ≤ 0.
It is worth pointing out that although exogenous qualities are
independent of the supplier bids, the buyer will not know the
value of Ri until evaluating supplier i’s bid. This is because Ri de-
pends on supplier i and the buyer will only score the exogenous
qualities when evaluating the supplier’s bid. Thus, the values of Ri
are determined by the buyer as part of the bid evaluation process.
Further, although the buyer is not able to form her evaluation of
Ri before supplier i makes a bid, she can still choose to reduce or
increase the supplier’s uncertainty about Ri by making the scoring
rule more or less explicit. Thus, the sequence of decisions is as fol-
lows:
1. Prior to calling for bids, the buyer determines the size of σ
at a cost CB (σ ), and accordingly describes her bid evaluation
method (i.e., the scoring rule) in the bid document. This has
the effect of determining the distribution for the error ε i .
2. Nature chooses the signals R  and errors ε from their distribu-
i i
tions. Each signal R  is an independent draw from a commonly
i
known continuous distribution that may depend on the sup-
plier i.
3. Each supplier observes R  , i = 1, 2, . . . , n, and then makes a bid
i
consisting of price and non-price attributes on the basis of the
distribution of ε i . This bid is made in a way that trades off the
supplier’s own profit with the likelihood of winning the con-
tract.
4. The buyer determines a value Ri for each supplier i, and chooses
the supplier that gives her the highest utility, i.e., the bid with

the highest value of Ri + m k=1 zik − yi .
Observe that the errors in the suppliers’ estimate of Ri (i.e., ε i )
will determine each supplier’s assessment of how competitive their
own bid is likely to be and hence the bid that is made, and so the
final outcome for the buyer depends on the level of uncertainty
faced by the suppliers.
In our analysis we will suppose that the signals R  are com-
i
mon knowledge. On the one hand, this is consistent with what of-
ten happens in practice, in that the suppliers usually have enough
knowledge about their competitors’ exogenous qualities, such as
past performance, reliability, strength of management team and so
on, based on news, reports, company newsletters, industry confer-
ences, word of mouth in the industry and other sources of in-
formation. On the other hand, if we do not make this assump-
tion, then each player will have further uncertainty on the other
player’s choice of price, and in equilibrium will be responding
to a mixture over possible price bids, which makes the analysis
intractable.
The buyer does not know the suppliers’ costs throughout the
auction. However, we assume that each supplier i is fully informed
about the costs of the other suppliers (and we will relax this as-
sumption in Section 6). The assumption that the suppliers know
the cost functions for other suppliers is likely to be the case in
practice if the same group of potential suppliers are in frequent
competition for work. For most bidding processes, a buying firm
generally knows less about the costs of different suppliers than the
suppliers themselves know about their competitors.
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4. Supplier bids Part (a) of the proposition is essentially the same as a result
of Che (Lemma 1 in Che (1993)). It shows that the quality levels
When making bid decisions, supplier i maximizes the expected chosen are independent of the competitive environment (i.e., the
profit number or aggressiveness of other bids) and clearly this property
  of the best response will carry over into any Nash equilibrium. In

m
i = yi − cik (zik ) Pi (yi , zi ), fact quality levels are chosen at the point which would maximize
k=1
the total (supply chain) profit if there were just one supplier. This
result follows intuitively from the observation that a bid without
where Pi (yi , zi ) is the probability that the bid (yi , zi ) is accepted. this property can be improved from the buyer’s perspective at the
We can calculate Pi (yi , zi ) by looking at the probability calculated same cost to the supplier: in a competitive environment it will al-
by player i that this bid has the largest utility for the buyer. Thus ways be best for the supplier to make this improvement.
  

m 
m The property (4.2) is satisfied by a great many distributions.
i − εi +
Pi (yi , zi ) = Pr R j − ε j +
zik −yi > max R z jk −y j For example suppose that −Xi has a log-concave density function;
j=i
k=1 k=1 it follows that −Xi has increasing hazard rate (see e.g. Bagnoli &
Bergstrom, 2005). Then, since the density and distribution function
We define the random variable
  for −Xi are given by f−X (x ) = fi (−x ) and F−X (x ) = 1 − Fi (−x ), it is

m

easily seen that the condition of an increasing hazard rate implies
j − ε j +
Xi = max R z jk j − y j R
R j + εi ,
j=i that Fi (x)/fi (x) is increasing and hence satisfies (4.2). Many distri-
k=1
butions have log-concave density functions (see e.g. Glaser, 1980)
which combines all the uncertainty from supplier i’s perspective. and we can deduce that the theorem will hold when Xi has either
In this expression we have written the bid for supplier j in terms a normal or a uniform distribution. Moreover, when the random
 . We write F and f for the distribution function and
of the signal R variables ε i and ε j appearing in Xi are all independent normal dis-
j i i
density function of Xi . Thus tributions or all independent uniform distributions, then since both
    convolution and maximum operators preserve an increasing hazard

m 
m
i = yi − i +
cik (zik ) Fi R zik − yi . rate (Barlow, Marshall, & Proschan, 1963), then (4.2) will be satis-
k=1 k=1
fied.
In order to look more closely at the equilibrium behavior in this
We are interested in equilibrium results and we begin by con- model we consider the simplest case with just two suppliers, i and
sidering the best response problem. What is the optimal behavior j. It is helpful to consider the distribution of the difference in the
for supplier i in submitting a bid, knowing the distribution of the errors for the two suppliers and we write G for the corresponding
random variable Xi (capturing the distribution of the best valuation cdf, so G(x ) = Pr(εi − ε j ≤ x ). The next result describes the equi-
amongst the other suppliers)? librium solution in the case where one supplier is better than the
Suppose there is at least some supplier offer that produces a other, both in terms of the cost structure and also the estimated
positive and bounded expected profit i and that the base utility values for Ri and Rj .
Ri is sufficiently large that at the optimum the buyer has positive
utility from the offer. Our first result gives the optimal bid for sup- Proposition 2. Suppose that there are two suppliers bidding and that
plier i in terms of the other players’ offers (captured in the random costs are parameterized by ρ with cik (z ) = ck (ρik , z ) and cik convex.
variable Xi ). We require cost functions that are strictly convex (i.e. Then if ε i and ε j are independent and identically distributed; ck sat-
have a second derivative strictly greater than zero) as well as a
isfies ∂ ck (ρ , z)/∂ ρ > 0 and ∂ 2 ck (ρ , z)/∂ ρ∂ z > 0 for each k; and sup-
non-restrictive condition on the distribution of Xi .
plier i dominates supplier j in the sense that ρ ik < ρ jk for all k, and
Proposition 1. Suppose that each cik is strictly convex and the ran-  ≥R
R  ; then in equilibrium: (a) supplier i has higher quality levels,
i j
∗ > z∗ ; (b) supplier i is more likely to be chosen than sup-
i.e., zik
dom variable Xi has a continuous density function. (a) The unique op- jk

∗ , k = 1, 2, . . . , m are given by
timal quality choices for the supplier zik plier j, i.e., F R  + m z∗ − y∗ > 1/2; (c) in the special case that
i i k=1 ik i
ck (ρ , z ) = ρ zqk for some constant qk > 1, supplier i has a higher price,
c ( ) = 1.
∗
ik zik (4.1) i.e., y∗i > y∗j .
(b) If the random variable Xi satisfies the condition
  Part (a) of this proposition follows directly from Part (a) of
d Fi (x ) Proposition 1. Part (c) of this proposition may fail for more general
> −1 (4.2)
dx f i (x ) cost functions. For example if there is just one non-price variable
in the range of Xi , then there is a unique optimal price bid y∗i satisfy- with parameterized cost function ck (ρ , z ) = 20ρ + ρ z2 and ρi = 1,
ing ρ j = 2, Ri = Rj = 0 and the error distribution is uniform on (−1, 1 )
      (so that εi − ε j follows a triangular distribution), then we can cal-

m 
m 
m culate y∗i = 38.70, y∗j = 40.23.
i +
Fi R ∗
zik − y∗i = y∗i − ( ) fi Ri +
∗
cik zik ∗
zik − y∗i . Proposition 2 may also hold for the situation where more than
k=1 k=1 k=1 two suppliers bid. For example, when there are three suppliers
(4.3) bidding, we can prove that all three parts of Proposition 2 hold
if the errors (ε i ) are i.i.d from a uniform distribution (see the
Notice that the price y∗i ,
implicitly defined by (4.3), contains de-
end of Appendix for the proof). For example, suppose there are
pendence on the other bids yj and zjk through the definition of the
∗ set by (4.1) can also be recast
three bidders i, j and l with c = ρ z2 and ρi = 2, ρ j = 3, ρl = 4, then
distribution Fi . The quality levels zik
Proposition 1(a) gives zi∗ = 1/4, z∗j = 1/6, zl∗ = 1/8. If the errors (ε i )
into values q∗ik in the case that zik = βk Sk (qik ). We let Cik (q) be the
are i.i.d uniform on (−1, 1 ) and the signals are R  = 4, R = 3, R
 =
cost of achieving a quality value q. Then Cik (q ) = cik (β Sk (q )) and i j l
Eq. (4.1) when expressed in terms of the original quality variables 2, then the probability of each supplier winning can be calcu-
becomes lated to be Pi = 0.63, Pj = 0.31, Pl = 0.06. Further, We can calculate
that y∗i = 1.53, y∗j = 0.84, y∗l = 0.43. However, the results may fail
Cik (q∗ik ) = β Sk (q∗ik ). for more general error distributions.

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5. The buyer’s optimal information revelation strategy
We are interested in the buyer’s optimal choice of the amount
of subjectivity to retain for bid evaluations which then determines
the uncertainty within which supplier bids are made. There is an
intuitive argument which suggests that, when suppliers are similar,
reduced uncertainty will lead to more competitive outcomes. If we
remove all uncertainty then we can expect a type of Bertrand com-
petition where the supplier with the best cost performance bids
at a price level that gives zero profit for the other suppliers. The
absence of uncertainty means that for any potential equilibrium
set of bids there is always a supplier who by lowering his bid to
just below the others’ can have a certainty of the contract being
awarded to him. This will destroy the equilibrium except in the
case described where price levels are so low that only one sup-
plier is left making profits.
It is not hard to see that the same arguments will not apply
when there is uncertainty in bid evaluations. The type of under-
cutting that forces prices down in the Bertrand case will no longer
operate in the same way, because a supplier bidding just below the
other bids will not be guaranteed to win the contract. This allows
equilibria to be supported in which prices are much higher, giving
more profit to the suppliers and less to the buyer.
We cannot conclude, however, that the lowest prices will oc-
cur when the buyer releases full information so that the suppliers
make zero error in their estimations of the score function. Con-
sider a small increase in uncertainty from a limiting case of zero
uncertainty. With no uncertainty the supplier with a cost advan-
tage sets a price just low enough to ensure that there is no money
to be made by the other supplier. But with a small amount of un-
certainty this price point is no longer clear. In this case it may be
better for the low cost supplier to set an even lower price to en-
sure that the other supplier is squeezed out. The combination of
intuitive arguments may lead us to expect that the buyer will ben-
efit by retaining a small amount of uncertainty for the suppliers,
and this is indeed what our results demonstrate.
To address the question of how much uncertainty is beneficial
for the buyer we analyze the case of two suppliers. From this point
1 1
on we specialize to the case of a single quality variable. This is
not really a restriction: we can reformulate the problem by sim-
ply considering the utility provided to the buyer at different lev-
els of expenditure by the supplier. Our assumptions on the func-
tions cik (zk ) allow us to find the single best combination of zk
values for any total expenditure, and we could parameterize the
resulting curve in z-space to recover an (artificial) single quality
variable.
Suppose that two firms i and j with a quality variable z have
[m5G;December 17, 2019;18:59]
rectly rather than working with the standard deviation σ . Given
the definition of CB (σ ), it follows that CB (α ) ≤ 0.
The utility for the supply chain if supplier i bids at a cost ci is
Ri + zi∗ − ci (zi∗ ) and similarly for supplier j. We define and φ as
the sum and difference of these two quantities, so
= Ri + zi∗ − ci (zi∗ ) + (R j + z∗j − c j (z∗j )),
φ = Ri + zi∗ − ci (zi∗ ) − (R j + z∗j − c j (z∗j )).
In the event that a stronger supplier lowers his price bid to just
below the point at which the second supplier can make money,
then the buyer will obtain a utility /2 − |φ /2|. This will be the
result if the buyer removes all uncertainty by setting α = 0.
At the point when α is chosen the buyer does not know the
characteristics of the suppliers. The key quantity is φ which cap-
tures the degree to which supplier i has an advantage over sup-
plier j. A larger value of φ indicates that supplier i, compared to
supplier j, will provide a larger utility to the supply chain if se-
lected, given that both suppliers make optimal bids for non-price
attributes. This advantage may come from a lower cost related to
quality attributes, or from other aspects of utility for the buyer. We
will assume that the distribution of φ (with a density function r(.))
is known to the buyer and we will show that the best choice of α
depends only on G0 and the distribution of φ . The distribution of φ
is able to represent the buyer’s uncertainty about both the supplier
cost functions and R values.
We define W0 (x) to be the value of w that solves
1 1
G0 ( w ) = (x − w )g0 (w ) + .
2 2
We show in the proof of Theorem 1 (see Appendix) how the
quantity W0 (x) is related to the equilibrium solution when x =
(Ri + zi∗ − ci (zi∗ )) − (Rj + z∗j − c j (z∗j )), which can be thought of as
the cost advantage of supplier i over supplier j given the obser-
vations R  and R  . The result below is established by showing that,
i j
for fixed φ , the part of the expected buyer profit that is affected
by α is α H(φ /α ) with the function H defined by

H (x ) = |W0 (t + x ) − t | − g0 (t )dt .
2 2g0 (W0 (t + x ))
Theorem 1. Suppose that the errors εi − ε j have a distribution that
is G0 scaled by a factor α chosen by the buyer. If G0 is symmetric
around zero and has a finite support (−M, M ) and density bounded
away from zero, except at the end points ± M where the density ap-
proaches zero, then the buyer’s utility is maximized at equilibrium by
choosing the α value that maximizes α Eφ (H (φ /α ) ) − CB (α ). The op-
timal value α ∗ is strictly greater than zero and satisfies
 
costs given by convex functions ci and cj , and the suppliers’ costs φ φ  φ
are known to each other. Write zi∗ and z∗j for the optimal choice of H ( ∗ ) − ∗ H ( ∗ ) r (φ )dφ = CB (α ∗ ).
α α α
the quality variable (so ci (zi∗ ) = cj (z∗j ) = 1).
Before the auction begins, the buyer makes a decision on the We can use this theorem to calculate the right choice of uncer-
information revelation strategy which essentially determines the tainty for the buyer for particular cases. We will concentrate on the
uncertainty distribution through scaling its variance up and down. case of quadratic costs where ci (z ) = ρi z2 and c j (z ) = ρ j z2 . Then
We write G0 (with a density function g0 ) for the standardized zi∗ = 1/(2ρi ), z∗j = 1/(2ρ j ) and
version of G, the distribution of the difference of errors for the  
1 1 1
two suppliers. We need G0 to be symmetric around zero (this is = + + Ri + R j ,
achieved by ε i and ε j independent and identically distributed). 4 ρi ρj
Also to avoid technical difficulties in the proofs it is simplest to
 
1 1 1
assume that G0 has a finite support (−M, M ) and g0 (w ) → 0 as φ= − + Ri − R j . (5.1)
4 ρi ρj
|w| → M and is bounded away from zero elsewhere.
We let α be the scaling factor applied by the buyer, with α > 0 Although the buyer does not know in advance the characteris-
and large α representing high uncertainty. Since both ε i and ε j are tics of the suppliers (i.e., ρ i , ρ j , Ri , Rj ), we assume that the buyer
drawn from a distribution which scales with α , we have a distribu- knows the distribution of φ . Recall that the value of φ captures
tion G(w ) = G0 (w/α ) for the combined error εi − ε j , and the den- the degree to which supplier i has an advantage over supplier j.
sity is given by g(w ) = α1 g0 (w/α ). It is convenient to express the The following corollary shows that the buyer should retain a larger
buyer’s cost as a function CB (α ), using the scaling parameter α di- amount of subjectivity/uncertainty in the announced scoring rule

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Fig. 1. Profit for the buyer and two suppliers when ε is uniform on the range
[−α /2, α /2] and supplier i’s advantage φ is uniform over [−2, 2].
when one supplier has a larger advantage over the other. If the
suppliers are identical and the information cost CB is zero, then it
becomes optimal for the buyer to reveal all information.
Corollary 1. If ci (z ) = ρi z2 and c j (z ) = ρ j z2 , φ is uniformly dis-
tributed over [−D, D], and ε i and ε j are uniformly distributed over
[−α /2, α /2], then when there is no cost to revealing information, the
optimal choice of the value α for the buyer is α ∗ = 0.12419D, where
the buyer obtains an expected profit of E ( )/2 − 0.20162D .
For the case of quadratic cost, uniform errors, and uniform
difference between two suppliers, Corollary 1 indicates that the
buyer’s optimal percentage of information revelation (i.e., α ∗ ) is
12.419% of the difference parameter D. We can see how this works
out on a particular example. Suppose that there are quadratic costs
and the buyer, who does not know the values of ρ i , ρ j , Ri or Rj in
advance of the auction, knows that φ defined in (5.1) follows a
uniform distribution over [−2, 2]. For example it may be that firm
i has a cost of quality given by ci (z ) = z2 /3 and firm j has a cost of
quality c j (z ) = z2 /2 and these are common knowledge. Then firm
i bids a quality level zi∗ = 3/2 with a cost of 3/4. Similarly z∗j = 1
with a cost of 1/2. In this case φ = Ri − R j + 1/4 and one example
of the required distribution for φ occurs when R j = 1/4 and Ri is
uniform over [−2, 2]. We consider the case where ε i , ε j follow uni-
form distributions over [−α /2, α /2] and the cost CB of revealing in-
formation is zero. The expected profits for the two players and the
expected utility for the buyer are plotted in Fig. 1 for E ( ) = 2.
We can see that, for values of α greater than about 0.25, reduc-
tions in the degree of uncertainty α makes the equilibrium more
competitive, leading to a better result for the buyer. However, for
small α , the situation is different. Supplier j makes almost no profit
and there is an increase in expected profit for supplier i when α
is decreased towards zero. This is associated with a loss of utility
for the buyer when the uncertainty α is set very low. From the
corollary we see that the best choice of α for the buyer is given
by α ∗ = 0.12419 × 2 = 0.24838. In addition, we can calculate that
the buyer’s expected utility at α ∗ is E (B ) = 1 − 0.20162 × 2 =
0.59676, where we write B for the utility of the buyer. This gives
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
[m5G;December 17, 2019;18:59]
7
Fig. 2. The optimal choice of α for the buyer when ε i , ε j is uniform on the range
[−α /2, α /2] and supplier i’s advantage φ ∼ N(d, 0.08).
a 19.4% increase in the buyer’s expected utility over the α = 0 case
(where E (B ) = 0.5) for these parameters.
A more realistic case has the supplier cost parameter following
a normal distribution. Suppose 1/ρ i ∼ N(8, 0.82 ), 1/ρ j ∼ N(4, 0.82 )
and Ri = R j = 0, so that φ ∼ N(1, 0.08). With the same cost func-
tions as in the example above (ci (z ) = ρi zi2 , c j (z ) = ρ j z2j ) and also
with ε i , ε j uniform over [−α /2, α /2], we find that the optimal
choice of α for the buyer is α ∗ = 0.2746, and this gives a 25.7%
increase in the buyer’s expected utility over the α = 0 case (where
E (B ) = 0.5 given E ( ) = 2). In fact we can reduce the difference
between the two suppliers by assigning smaller mean values (d)
for the distribution of the φ . Fig. 2 depicts the buyer’s optimal
choice of α when the mean difference between the two suppliers
d varies in the range from 0 to 1. As before we see that the buyer
will retain a greater amount of uncertainty when the suppliers are
more unequal.
We can also look at the effect of changes in the variance of
the φ distribution, corresponding to changes in the degree of un-
certainty for the buyer about the supplier characteristics. Sup-
pose 1/ρ i ∼ N(8, s2 ) and 1/ρ j ∼ N(4, s2 ); then we have φ ∼ N(1,
s2 /8). With the same parameters as in the example above (ci (z ) =
ρi zi2 , c j (z ) = ρ j z2j , Ri = R j = 0) and also with ε i , ε j uniform over
[−α /2, α /2], for different levels of buyer uncertainty in supplier
cost (captured by s values), we can calculate the buyer’s optimal
choice of α under different s values (see Fig. 3). In this example
the buyer chooses to reduce the uncertainty for the suppliers when
more uncertain about the suppliers’ costs.
6. Supplier uncertainty on costs
In this section, we relax the assumption in Section 5 that the
suppliers know each other’s costs. Now we consider a bidding situ-
ation where each supplier has private cost information that is only
known to himself, and the buyer has private information on how
to evaluate the suppliers.
Our aim is to look at how the results may change when there is
uncertainty by one player about the cost parameters of the other.
JID: EOR
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8 C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx
Fig. 3. The optimal choice of α for the buyer when ε i , ε j is uniform on the range
[−α /2, α /2] and supplier cost parameters 1/ρ i ∼ N(8, s2 ), 1/ρ j ∼ N(4, s2 ).
Again we consider two players with just one quality variable and
we analyze a sealed bid auction.
We suppose that costs are governed by a single parameter ρ i ,
so that the costs of achieving a quality level z are given by ci (ρ i ,
z). The ρ values are drawn from a known distribution: each firm
knows its own costs but does not know the costs of the other. As
before we write yi for the price and zi for the quality choice for
supplier i.
A simple approach (related to discretization of cost parameter
values) is to assume that suppliers can be of one of two types: ei-
ther a high cost or a low cost supplier. This allows us to explore
the impact of increasing cost uncertainty by increasing the differ-
ence between the two types. Assume to start with that each sup-
plier has equal chance of being a high or low type, so that player
i is equally likely to have parameter ρ iH or ρ iL (with ρ iH > ρ iL ).
Player i knows his own type but not that of the other player. Thus
player i will choose one of two prices yiH and yiL and player j will
choose one of the prices yjH and yjL .
Recognizing zi∗ (ρiH ) is determined by C  (ρiH , zi∗ (ρiH )) = 1 (and
similarly for zi∗ (ρiL ), z∗j (ρ jH ), and z∗j (ρ jL )), we define the random
variable
j + εi − ε j + z∗ (ρ jH ) − y jH with probability 1/2
Xi = R j for the suppliers. As θ increases, and the degree of cost uncer-
j + εi − ε j + z∗ (ρ jL ) − y jL with probability 1/2.
=R
j
We will continue to assume that the two suppliers make the same
 and R
estimates for R  – it is only the cost function which is pri-
i j
vate information. Then
Fi (x ) = Pr (Xi < x )
value, as θ tends to zero, matches the result of Corollary 1.
= 1/2 Pr εi − ε j < x − Rj − z∗j (ρ jH ) + y jH
7. An open auction
+ 1/2 Pr εi − ε j < x − R j − z∗ (ρ jL ) + y jL
j
Two key assumptions of the analysis in Section 5 are that sup-
= G x−R j −z∗ (ρ jH ) + y jH + G x − R j − z∗ (ρ jL ) + y jL /2,
j j
tice we might suppose that the signal R  is only available to sup-
j − z∗ (ρ jH ) + y jH + g x − R
f i (x ) = g x − R j − z∗ (ρ jL ) + y jL /2.
j j
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Thus the first order condition for the high type i player is:
G Ri + z∗ (ρiH ) − yiH − R
j − z∗ (ρ jH ) + y jH
i j
i + z∗ (ρiH ) − yiH − R
+G R j − z∗ (ρ jL ) + y jL
i j
= yiH − CiρiH , zi∗ (ρiH ) g Ri + zi∗ (ρiH ) − yiH − Rj − z∗j (ρ jH ) + y jH
+ yiH − Ci ρiH , zi∗ (ρiH ) g R i + z∗ (ρiH ) − yiH − Rj − z∗ (ρ jL ) + y jL .
i j
(6.1)
There is a similar first order condition for the low type i player
(with iH replaced by iL). Also there are sets of conditions for the
two j player types, obtained by simply swapping the roles of i and
j. We end up with four equations from which we can calculate yiL ,
yiH , yjL and yiH given the cost function and the pattern of ε uncer-
tainty captured in g and G.
Consider a quadratic cost function ci (ρ i , z) so that ziH∗ (ρ ) =
iH
1/ρiH , ziL (ρiL ) = 1/ρiL (and similarly for j), and we can consider dif-
∗
ferent levels of cost uncertainty through a parameter θ that cap-
tures the difference between high and low cost types. Because of
the way that ρ appears as an inverse in the first order conditions,
it will be easiest to take ρ1 = ρ1 + θ , ρ1 = ρ1 − θ , ρ1 = ρ1 + θ ,
jL j jH j iL i
ρiH = ρi − θ . We can calculate the buyer’s optimal choice of uncer-
1 1
tainty for a specific distribution of G assuming for simplicity that
the buyer’s cost of information revelation CB is zero.
The solution of the four sets of first order conditions is quite
complex and can only be achieved numerically for specific exam-
ples. We will consider an example, where ε i , ε j are uniformly dis-
tributed over [−α /2, α /2]. Let Ri = R j = 0, 1/ρi = 2, 1/ρ j = 1. Then
the first order condition (6.1) becomes
G R j + 1 − yiH + y jH + G R
i − R j + 1 − 2θ − yiH + y jL
i − R
i − R
= (yiH − 1 + θ /2 ) g R j + 1 − yiH + y jH
+g R j + 1 − 2θ − yiH + y jL
i − R ,
and there are three other similar first order conditions. The equi-
librium solution depends on R  −R  which is a random variable de-
i j
pending on ε i and ε j .
For given values of α and θ we can numerically calculate the
expected buyer utility through sampling from the different values
 −R
of R  that may occur. Note that here we assume that R and R
i j i j
are fixed, whereas in Fig. 1 the R values are not known in advance.
From the buyer’s perspective the different types of supplier who
she may be facing correspond to a distribution on possible φ val-
ues. The difference to our previous analysis is that this uncertainty
about φ in advance of the auction carries over to additional un-
certainty for the suppliers at the time of the auction. Fig. 4 shows
how the expected buyer utility changes with α ; it can be calcu-
lated that the optimal values of α for θ = 0.15, 0.1, 0.05, 0.01 are
α ∗ = 0.028, 0.032, 0.036 and 0.039, respectively.
The overall behavior is similar to that we see in Fig. 1. The best
result for the buyer is to retain a small amount of uncertainty
tainty increases, the overall result for the buyer improves, since the
stronger of the two suppliers no longer wishes to squeeze out all
profit for the other. But despite this effect, there is still a benefit
from setting a non-zero level for α .
There is a similarity between the trends we observe here and
that of Fig. 3; when the buyer has more cost uncertainty (with
larger θ ), the optimal choice of α decreases a little. The limiting
pliers know each others’ costs and each others’ signals R. In prac-
i
plier i, so this second assumption is questionable. As we will see,
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C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx
Fig. 4. Profit for the buyer when ε is uniform on the range [−α /2, α /2] and each
supplier’s cost can be one of two types.
in an open auction environment both of these assumptions can be
dropped. Each supplier will know the other’s choice of quality vari-
able z∗ as the auction proceeds; and moreover we can carry out an
analysis in which the players receive different signals (i.e., player
i may have a different estimate of Rj than the estimate made by
player j).
We will consider how our results carry over to this situation.
For simplicity we continue to consider the case with just two sup-
pliers. From Theorem 1 we know that suppliers will keep their
non-price variables at the same values and only rebid on price.
The sequence of decisions is similar to that of the sealed-bid case.
However, during the time period when the auction is open (e.g.,
24 hours), the suppliers can rebid and the bid immediately be-
comes known to the other supplier; an open auction will require
bidders to progressively improve their bids, which in this context
implies decreasing prices; the open-bid auction ends when time
runs out (sometimes with rules for possible extensions). We as-
sume that as the auction progresses, the buyer does not share in-
formation on the ranking between bids. Like the sealed-bid case,
the contract will be awarded to the supplier with the highest score.
Because of the existence of non-price variables as part of the
bids, together with uncertainty in buyer evaluations we need to
modify the typical descending price procurement auction. As the
auction proceeds suppliers are aware of other price bids, and a
supplier bidding a higher price will do so knowing that the buyer
may select him because he is preferable on some non-price dimen-
sion (see Jap, 2002 and Haruvy & Katok, 2013 for a description of
this type of behavior). In these circumstances it is appropriate to
model the auction by supposing that the suppliers alternate and
bid their best response to the current bid of the other supplier.
Our first result is that this open bidding process gives decreasing
prices that converge to an equilibrium.
In this model it is not necessary to assume that there are com-
mon estimates of the R values, or that ε i and ε j have the same
distribution. In the two player version of this model the equilib-
rium will be determined by supplier i and j’s private signals (R

and R j , respectively) as well as the views of both players, i.e., sup-
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
[m5G;December 17, 2019;18:59]
9
plier i’s estimate of Rj (denoted by R  ), and supplier j’s estimate of
ij

Ri (denoted by R ji ). Denote εi j = R j − R  as the error in supplier i’s
ij
estimate of Rj . We will start by assuming that neither of the sup-
pliers updates his R estimates on the basis of the bids of the other
player that are observed (and then discuss this assumption).
We write Gi for the cumulative distribution function for εi − εi j ,
with corresponding density function gi . Similarly Gj , with density
gj is the distribution for ε j − ε ji . We can reformulate the condition
(4.3) as
Gi y j − y∗i + ηi = y∗i − ci (zi∗ ) gi y j − y∗i + ηi , (7.1)
 +z − R
where ηi = R  + z . Similarly
∗
i i ij j
G j yi − y∗j + η j = y∗j − c j (z∗j ) g j yi − y∗j + η j , (7.2)
 
 + z∗ − R
where η j = R  + z . Eq. (7.1) determines player i’s
j j ji i
best response to the bid yj , zj assuming that the non-price vari-
able is bid at its optimum value. And similarly the second equation
describes player j’s best response to yi , zi .
Lemma 1. Suppose that the density functions gi and gj are continu-
ous, have finite support (Li , Ui ) and (Lj , Uj ), and
d Gi ( x ) d G j (x )
> 0, > 0, (7.3)
dx gi (x ) dx g j (x )
for x in the appropriate range. Suppose also that the bidding process
involves each supplier playing a best response to the other, alternat-
ing between bids from the two suppliers. Then, provided that the ini-
tial bid price by the opening bidder is high enough, the bids for each
player will decrease, and converge to the equilibrium solution.
As we discussed earlier the condition (7.3) holds for any log
concave distributions and so is not very restrictive.
Now we give some further discussion of the assumption that
the players do not change their beliefs on the basis of bids ob-
served. In this model we are assuming that costs for the other
player are not known and this makes it impossible for supplier i
to deduce information about R  from a single response by supplier
j
j since the size of the term (y∗j − c j (z∗j )) in (7.2) is unknown to
player i even after observing the best response y∗j , z∗j .
However, it could be that a player makes deductions from a
succession of bids by the other player. Thus for example, if player
i knows Gj and observes successive responses y∗j , since the term
c j (z∗j ) does not change, a succession of solutions to (7.2) will allow
player i to deduce the value of R  −R  which is the unknown com-
j ji
ponent of ηj . In fact two responses to different bids yi will provide
two equations from which to deduce the unknown ηj and c j (z∗j ).
We can then ask whether this information will have an impact on
 −R
supplier i’s estimate of R  . For example, if player i thinks that
i ij
he has a significant advantage in the sense that R  −R  is large
i ij
and positive and later learns from looking at player j’s responses
that player j believes that there is no advantage (so R  =R  ), then
j ji
we expect that player i should adjust his beliefs. But for our result
we need to assume that there is no belief updating of this type.
The simplest case where there is no adjustment required is when
there are common estimates for the R values as we assumed in the
sealed bid auction.
Having established the mechanism whereby the equilibrium is
reached we can give a counterpart to Theorem 1 that determines
the optimum amount of uncertainty from the buyer’s perspec-
tive. In this result we assume that the open auction runs for long
enough for the equilibrium to give the best estimate of the final
outcome. Suppose that Gi and Gj both have distribution G with
 density g and this is symmetric around 0. As before we will sup-
i
pose that there is a base distribution given by G0 (density g0 ) and
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10 C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx

the buyer chooses a degree of uncertainty defined by α where feedback achieves the same result as one in which the buyer re-
G(w ) = G0 (w/α ) and g(w ) = α1 g0 (w/α ). Similar to W0 (x), we de- veals complete information about the Ri values.
fine a function with three parameters by setting W0 (xi , xj , z) to be Thus the result of Theorem 2 shows that the buyer may prefer
the value of w solving not to give rank feedback if it is possible to leave an appropriate
amount of uncertainty for the bidders.
G0 ( w + xi ) 1 − G0 ( w + x j )
− = z − w.
g0 ( w + xi ) g0 ( w + x j ) 8. Conclusion and Discussion
We then define the double integral
In this paper we consider a procurement auction, in which the
 


φ 1 − G0 (W0 (ti , t j , φα ) + t j ) supplier bids involve both price and non-price attributes. We as-
J = − sume the buyer has a separable utility function so that the utility
α g0 (W0 (ti , t j , φα ) + t j )
    can be obtained by taking the scores of each supplier on each of
φ the attributes, and combining these with appropriate weights on
+ max W0 ti , t j , ,0 g0 (t j )g0 (ti )dt j dti .
α different attributes. Although the buyer usually announces a scor-
ing rule prior to bidding, due to the subjective components in the
Theorem 2. Suppose that both εi − εi j and ε j − ε ji have a distribu- scoring rule, the suppliers still do not know the precise scores they
tion that is G0 scaled by a factor α chosen by the buyer. If G0 is sym- will be given on the bidding attributes. It is optimal for each sup-
metric around zero and has a finite support (−M, M ) and density ap- plier to bid the non-price attributes at the values that would be
proaching zero at the end points ± M, and bounded away from zero chosen if there were no other bidders involved.
on (−M, M ), then the buyer’s utility is maximized at equilibrium by The aim of this research is to establish the amount of informa-

choosing the α value that maximizes α J (φ /α )r (φ )dφ − CB (α ). This tion the buyer should reveal to the bidders (prior to bidding) about
gives an optimal value α ∗ > 0 that satisfies the equation the scoring rules in bid evaluation, namely, the extent to which

    every component of the scoring rule is fully explicit. We explore
φ φ  φ
J − ∗J r (φ )dφ = CB (α ∗ ).
α∗ α α∗
As for Theorem 1, the amount of uncertainty that is best for
the buyer is directly related to the distribution of the parameter φ
which captures the difference in the relative strengths (costs and
base utilities) of the two suppliers.
For specific distributions G0 we can numerically calculate the
optimal choice of α , but the triple integral involved makes this
much more computationally challenging than the calculations
needed for the sealed bid case. It is interesting to look at the re-
sults we get for the case where G0 is a triangular distribution (cor-
responding to uniform distributions for ε ) and φ follows a uni-
form distribution over [−D, D], and compare this with the result
of Corollary 1. We find when all the relevant random variables ε i ,
ε j , ε ij and ε ji are uniform on [−α /2, α /2] and there is no cost for
revealing information, then the buyer’s expected utility is maxi-
mized by taking α ∗ = 0.0164D. So for this case the best choice of
uncertainty for the buyer is very small: it is only about 13% the
size that is best for a sealed bid auction, under the assumptions
we made earlier.
Many open auctions include rank feedback, so that after each
round of bids the current winning bidder is identified. This feed-
back gives information to both bidders in a way that progressively
reduces the uncertainty. If (yi , zi ) is preferred to (yj , zj ) then both
players can use the fact that Ri + zi − yi > R j + z j − y j to reduce the
ranges of the random variables ε i , ε j , ε ij and ε ji . This will imply
that our earlier result of decreasing prices from best response bid-
ding will not hold in the open auction case. Assuming that the auc-
tion rules force bidders to improve their bids at each round, then a
bidder who makes the best response may end up regretting having
bid so low.
Note that there is no incentive for the current winning bid to
be improved; so we may suppose that the losing bidder improves
their bid if there is the opportunity to do so and still make money.
From our observation above that bidders may regret bidding too
low, the best strategy is to do this in the smallest increments that
the auction allows. The auction finishes when the losing bidder,
say j, bids at a price y j = c j (z∗j ) (with zero profit). Since the win-
ning bidder, i, has made only the smallest possible reduction in
price at each step their price bid is at the next increment be-
low Ri + zi∗ − R j − z∗j + c j (z∗j ). In fact, this is the solution that arises
when there is no uncertainty. Hence the open auction with rank
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
this question in detail when there are two suppliers. We consider
two different models. In a sealed bid environment, we begin by
assuming that the supplier knows the cost of his opponent and
that the suppliers make the same estimates of the buyer’s evalu-
ations. We then extend this model to a setting in which suppliers
do not know each others’ costs. In an open bidding environment,
we show that it is natural for each supplier to bid a sequence of
reducing prices that converge to an equilibrium. In this case we
no longer need to make an assumption that a supplier knows the
competitor’s cost and we can also deal with the case where sup-
pliers are more uncertain about the evaluation of the competitor
by the buyer than about their own evaluations.
Our main results (Theorems 1 and 2) show that even if the
cost of information revelation is zero, it is not optimal for the
buyer to reveal all information explicitly eliminating the bidders’
uncertainty on scoring rules: from the buyer’s perspective it is best
to retain a small amount of subjectivity in the scoring rule leav-
ing suppliers with some uncertainty as to how their bids will be
scored. The choice of this optimal information revelation is de-
termined by the asymmetry between bidders; the more difference
there is between the cost functions, the greater the degree of sub-
jectivity that the buyer will wish to maintain. By doing this, the
low cost supplier, in order to ensure that his bid is accepted, will
be induced to bid at a price even lower than the expected value
required to match the lowest possible bid from the high cost sup-
plier.
Though we have proved our results only for the case with two
suppliers, the underlying structure of the problem will also hold
with more than two suppliers. If suppliers are similar in terms of
cost and base utility, then there is no advantage to the buyer in re-
taining subjectivity on how individual supplier bids will be scored.
However, if the strongest supplier is significantly better than the
second best supplier, then there will be a reason to be less explicit
in describing the scoring method that will be used.
There are implications that we can draw for managers engaged
in this type of procurement, especially in the private sector. The
key question to be considered is whether there is likely to be a
single supplier who dominates the others (either with lower cost
or stronger in some other way). In the case that the buyer expects
the two leading suppliers to be similar when costs and other as-
pects are taken into account, then given that there is likely to be
some residual uncertainty no matter what the buyer does, we rec-
ommend that the buyer should strive for as explicit and objective
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C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx 11

a scoring rule as possible. Increased explicitness will reduce the plier i if accepted is
degree of uncertainty experienced by the bidders, which in most 
yi + cik (zik
 ∗
zik ) + δ /2 −
) − cik ( ci j (
zi j ) − cik (zik
∗
)
cases leads to lower prices; and this will lead to lower profits for
j=k
the suppliers and a higher utility for the buyer. This observation
resonates with previous findings that uncertainty (on rivals’ costs) 
m
makes the equilibrium (of Bertrand competition) less competitive = 
yi − zi j ) + δ /2,
ci j (
(Spulber, 1995), and that increased uncertainty of contestants can j=1
be beneficial for tournament since it intensifies competition (Pull, which is strictly greater than the profit from (
yi , 
zi1 ,  zim ) if
zi2 , . . . , 
Bäker, & Bäker, 2013). this bid is accepted. The new bid has a probability of being ac-
In these circumstances the buyer should release information on cepted given by
aspects of the firm evaluation that cannot be changed at the time  
of the bid. For example, suppose that a supplier knows that they 
Pi (
yi ,  i +
zi ) = Fi R 
zi j + ∗
zik −
yi − cik zik zik ) − δ /2
( ) + cik (
∗
will score less highly because of a late delivery on a previous sup-
j=k
ply contract, but cannot be sure how much of a penalty this will
lead to. Then this uncertainty will usually lead to a higher bid than    
if the uncertainty is removed, so from the buyer’s perspective it is 
m 
m
i +
= Fi R yi + δ /2
zi j − 
 i +
≥ Fi R zi j − 
 yi .
usually better that the supplier is fully informed of the penalties
j=1 j=1
that will be applied. Although there may exist some cost for the
bid evaluation committee to reduce subjectivity in the scoring rule Thus we have shown that the bid ( zi ) achieves a strictly bet-
yi , 
(say, meeting in advance and engaging in thorough discussions), it ter expected profit for supplier i, contradicting the optimality of
is still beneficial for the buyer to increase explicitness of the scor- ( zi ). Hence the zik
yi ,  ∗ values give the unique optimal quality bids

ing rule as long as the benefit from intensified supplier competi- for supplier i.
tion outweighs the cost of information revelation. (b) The first order conditions for a maximum of the expected
However, there are circumstances where our recommendations profit i give (4.3) as the first order condition for yi . The next
are different. In the case where there is a leading supplier who step is to show that the solution to (4.3), is unique. Let w =
dominates either because of their low price structure, or because  + m z∗ − y and s = R
R  + m z∗ − m c (z∗ ) so s − w =
i m k=1 ik i i k=1 ik k=1 ik ik
they have a large advantage in some other aspect of the bid, then yi − k=1 cik (zik ) and we can rewrite our defining equation as
∗

it will be better to retain some degree of subjectivity in relation Fi (w ) = (s − w ) f i (w )

. Suppose

there
is
more than one solution, say
to the bid evaluations, particularly with a sealed bid auction, even w1 < w2 with Fi w j = s − w j fi w j for j = 1, 2. Then
if the buyer’s cost of information revelation is negligible. In this
case, where there is a clear leader amongst possible suppliers, the Fi (w1 ) Fi (w2 )
+ w1 = + w2 .
buyer is likely to be fully aware of which is the leading supplier. f i ( w1 ) f i ( w2 )
But the procurement auction is required either because of fairness
Hence we can apply the mean value theorem to Fi (w )/ fi (w )
concerns, or because it is a useful way to fix the price and to avoid
the possibility of corruption if the contract is simply assigned to and deduce that there is some point between w1 and w2
the leading supplier at a mutually agreed price. where
The same argument applies whenever the buyer expects that
 
d Fi (w )
there is likely to be a large difference between the suppliers. Es- = −1.
dw f i (w )
sentially a reduction in full explicitness acts in a way that disad-
vantages the supplier who has a cost advantage, and this gives a This contradicts (4.2) and so we deduce that there is a unique so-
benefit to the buyer. This is consistent with the optimal auction lution to (4.3). Finally we check the second order conditions. We
design insight (Che, 1993), that the buyer benefits when the cost- continue to write w for R + m z∗ − y . For small values of y the
i k=1 ik i i
advantageous bidder is induced to bid more aggressively. This is left hand side of Eq. (4.3) is positive (since the F term is 1 and the
achieved without the need for a buyer’s scoring rule different from f term is zero). Given the uniqueness of the zero point (4.3) we can
the actual buyer preference and hence does not rely on the buyer’s deduce that the derivative with respect to yi at the solution point
commitment power (see Section 4 of Che, 1993). is negative, i.e.,
 

m
∂ 2 i
Acknowledgments yi − cik (zik ) fi (w ) − 2 fi (w ) = < 0.
k=1
∂ y2i
This research was supported by the National Natural Science Before starting with the proof of Proposition 2 it is convenient
Foundation of China (71902205), and the Humanity and Social Sci- to establish a preliminary lemma giving an identity that applies
ence Foundation of Ministry of Education of China (18YJC630134). with two suppliers when ε i and ε j are independent and identically
distributed.
Appendix: Proofs of Theorems and Propositions

Lemma 2. Suppose that there are two suppliers and that errors are
Proof of Proposition 1:
symmetric, so that we can write the distribution function G = Gi = G j ,
with density function g. If the bids y∗i , zik
∗ and y∗ , z∗ are an equilib-
(a) The proof of this result is similar to that of Lemma 1 in j jk
Che (1993). Since we assume cik strictly convex, the value zik ∗ is rium, then
 
the unique maximizer of z − cik (z ). Suppose that an optimal bid is

m

(
yi , 
zi1 ,  zim ) with 
zi2 , . . . ,  ∗ . We let  = y∗i − ck ( ρ ∗
) gW ,
zik = zik G W ik , zik (A1)
k=1
δ = zik∗ − cik (zik∗ ) − 
zik + cik (
zik ) > 0.  


m

Consider choosing a new bid with  yi = 

yi + cik (zikzik ) + δ /2,
∗ )
− cik (  =
1−G W y∗j −  .
ck (ρ jk , z∗jk ) g W (A2)
 ∗ and all other 
zik = zik zi j values equal to 
zi j . Then the profit to sup- k=1

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12 C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx

where Proof of Theorem 1:

 = z ∗ − z ∗ − y∗ + y∗ + R
W i − R
j . (A3)
i j i j
We will use Lemma 2 to express the buyer profit in terms of
 . We can add (A1) and (A2) to obtain
W
Proof of Lemma 2:

 .
1 = y∗i + y∗j − ci (zi∗ ) − c j (z∗j ) g W
By symmetry G(x ) = Pr(εi − ε j < x ) = Pr(ε j − εi > −x ) =
1 − G(−x ) and g(x ) = g(−x ). Then the required identities are Then we substitute for y∗j from (A3) and obtain
immediate from (4.3) and the equivalent form for supplier j.

1 = 2y∗i − (zi∗ − z∗j ) − R j + W

i + R  − ci ( z ∗ ) − c j ( z ∗ ) g W
 ,
i j
Proof of Proposition 2: and hence
 
(a). Since we assume that ∂ 2 ck (ρ k , zk )/∂ ρ k ∂ zk > 0 and given 1 1
ρ ik < ρ jk , it follows that: y∗i =
+ (zi∗ − z∗j ) + Ri − Rj − W
 + ci ( z ∗ ) + c j ( z ∗ ) .
2 
g W
i j
 
∂ ck (ρik , z )  ∂ ck (ρ jk , z ) 
∂z  ∗ < ∂z  ∗ = 1. (A4) Similarly, we have
 
z=z jk
z=z jk
1 1
In addition, ∗
zik satisfies the following equation: y∗j =
− (zi∗ − z∗j ) − Ri + Rj + W
 + ci ( z ∗ ) + c j ( z ∗ ) .
 2 
g W
i j

∂ ck (ρik , z ) 
 = 1. (A5) We can take the expression for y∗i and substitute into (A1) to show
∂z ∗
z=zik  is given by the solution to
that W
Given the convexity of cik , it follows that ∂ ck (ρ ik , z)/∂ z is increasing
1

1
in z. Therefore, we have shown that zik ∗ > z∗ from (A4) and (A5).  =
G W  + (z∗ − z∗ ) + R
−W j − ci (z∗ ) + c j (z∗ ) g W
i − R  + .
jk i j i j
2 2
Before moving to part (b) we observe that z − ck (ρk , z ) is con-
cave as a function of z. Denote C = maxz (z − ck (ρk , z ) ). Since zk∗  (x ) to be the value of w that solves
If we extend this by defining W
achieves this maximum we can write C = zk∗ − ck (ρk , zk∗ ). Then
1 1
the envelope theorem gives G (w ) = (x − w )g(w ) + , (A8)
2 2
∂ C ∂ c (ρ , z )
= − k k k < 0.  is given by W  (z∗ − z∗ + R
 −R − c (z∗ ) +
∂ρk ∂ρk then the quantity W i j i j i i
c j (z j )).
∗
Since ρ ik < ρ jk , this implies that
If we consider Ri and Rj as fixed, the profit made by the buyer
∗
zik − ck (ρik , zik
∗
) > z∗jk − ck (ρ jk , z∗jk ). (A6) for a given value of α is

 > 1/2. We
(b) The condition we require is equivalent to G W B = max(Ri + zi∗ − y∗i , R j + z∗j − y∗j ) − CB (α )

establish a contradiction by supposing that G(W ) ≤ 1/2. This im-

= R j + z j − y j + max Ri − R j + zi − z j + y∗j − y∗i , 0 − CB (α ).

∗ ∗ ∗ ∗
plies, from (A1) and (A2),

m 
m We can determine the profit made by the buyer given a particular
y∗i − ck (ρik , zik
∗
) ≤ y∗j − ck (ρ jk , z∗jk ). ε i and ε j using the fact that
k=1 k=1
y∗j − y∗i = W i + R
 − (z∗ − z∗ ) − R j ,
 ) ≤ 1/2 then the symmetry of G implies W
If G(W  ≤ 0. Thus we i j

have  = R − ε and R
where we have R  = R − ε . Thus
i i i j j j

m 
i − R
R j + (zik∗ − z∗jk ) ≤ y∗i − y∗j , 1 1  + ci ( z ∗ )
B = R j + z∗j −
− (zi∗ − z∗j ) − Ri + R j − x + W
k=1
2 
g W
i

and these inequalities together imply 


m 
m 
m
i − R
j + + c j z∗j  − ( z ∗ − z ∗ ) − Ri
( ) + max Ri − R j + zi∗ − z∗j + W
R (zik∗ − z∗jk ) ≤ ck (ρik , zik
∗
)− ck (ρ jk , z∗jk ). (A7) i j
k=1 k=1 k=1

This contradicts (A6) considering R  −R

i
 ≥ 0. So we have estab-
j
+ R j + εi − ε j , 0 − CB (α ).

lished that G(W ), the probability of supplier i being selected, is Hence
strictly greater than 1/2.  
(c). In the special case ck (ρik , z ) = ρik (z )qk , the value zik
∗ is de- 1 1 

qk −1 B = −
+ + ε j − εi − W
termined from qk ρik zik
∗ = 1. Thus 2 
g W

ck ( ρ ∗
ik , zik )= ∗
zik /qk .  + εi − ε j , 0 − CB (α ).
+ max W (A9)
 ) > 1/2 and thus, from (A1) and (A2),
From part (b) we have G(W We can rewrite this more fully as

m 
m  
y∗i − ck ( ρ ∗
ik , zik )> y∗j − ck ( ρ ∗
jk , z jk ). 1 1  (ξ + φ )
B (ξ , φ , ) = −
+ ξ −W
k=1 k=1 2 
g W (ξ + φ )
Hence


m
+ max W (ξ + φ ) − ξ , 0 + − CB (α )
y∗i > y∗j + ( ∗
zik − z∗jk )/qk , 2
k=1 where ξ = ε j − εi is the combination of the errors in the suppliers’
and the result follows from part (a). estimation.

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 (x ), but using G
We can define W0 (x) in the same way as W Now W0 (t + z ) solves G0 (w ) = 12 (t + z − w )g0 (w ) + 12 . Since w
0
and g0 in the expression (A8). Hence is in (−M, M ), the solution for large z must have g0 (w ) → 0. More-
over G0 (w ) > 0.5 and so we have W  (t + z ) ≈ M when z is large
0
1 1
G(αW0 (x ) ) = G0 (W0 (x )) = (x − W0 (x ) )g0 (W0 (x )) + enough. Then for large z,
2 2
1 1 2G0 (W0 (t + z ) ) − 1 1
= (α x − αW0 (x ) )g(αW0 (x, φ )) + . g0 (W0 (t + z )) = ≈ .
2 2 (t + z − W0 ) t +z−M
By comparing this with (A8) we see that +M 1 t +z−M

 (α x ) = αW0 (x ),
W H (z ) ≈ (M − t ) − g0 (t )dt
−M 2 2
+M  z
 z
and hence
  = M−t − g0 (t )dt = M − ,
2 2
 (ξ + φ ) = αW0 ξ φ −M
W + .
α α using the fact that the error distribution has zero mean. Hence
 (z ) ≈ −1/2 and H(z) > zH (z) as we require.
H
The best value of α for the buyer is the value ( ≥ 0) that max-
imizes Eξ ,φ , (B (ξ , φ , )). Since the expected value of the /2 Proof of Corollary 1:
component does not affect the choice of α , we will maximize:
 When each ε has a uniform distribution, we will have a trian-
1 ξ  (ξ + φ )
W
Ex,φ − + − gular distribution for εi − ε j . We take the support of G0 as (−1, 1 )
 (ξ + φ ))
2g(W 2 2 so g0 (x ) = 1 + x for −1 ≤ x ≤ 0 and g0 (x ) = 1 − x for 0 ≤ x ≤ 1
 and G0 = (1/2 ) + x + (x2 /2 ) for −1 ≤ x ≤ 0 and G0 (x ) = (1/2 ) +

 (ξ + φ ) − ξ , 0
+ max W − CB (α ) x − (x2 /2 ) for 0 ≤ x ≤ 1.
 Since ci (z ) = ρi z2 so that zi∗ = 1/(2ρi ) and z∗j = 1/(2ρ j ) and so
 
ξ ξ φα α φ = Ri − R j + (1/4 )(1/ρi − 1/ρ j ). If φ is uniformly distributed over
= Ex,φ − + −
W0

[−D, D], then r (φ ) = 1/(2D ).

2 2 α α 2g0 W0 αξ + φα
Now W0 (x) is the value of w solving G0 (w ) = 12 (x − w )g0 (w ) +
   
ξ φ 1
. Since we want to find a value where W0 (t, z) > 0 we will solve
+ max αW0 − ξ,0 − CB (α )
2
+
α α 1 1 1
      + w − ( w2 /2 ) = ( x − w ) ( 1 − w ) +
2 2 2
1  ξ φ 
 α
= Ex,φ αW0 + − ξ −

− CB (α ) 2w − w2 = ( x − w ) ( 1 − w ).
2 α α 2g0 W0 αξ + φα  

From this we can deduce that W0 (x ) = 1
x+3− ( x − 1 )2 + 8
Since ξ has distribution g(ξ ) and φ has distribution r(φ ), we 4

can rewrite the expectation (i.e., the first part of the expression (note that it is easy to check that this solution is positive).
above) as a double integral: Now
  0 
      φ φ 1
W0 (t + ) − t − (1 + t )dt
1  ξ φ  α 2H =
αW0 + − ξ  −

g(ξ )r (φ )dξ dφ α −1 α 1 − W0 (t + φα )
2 α α 2g0 W0 αξ + φα t∗  
      φ 1

1  ξ φ ξ  + W0 (t + ) − t − (1 − t )dt
= W0 + − −
1

g0 (ξ /α )dξ r (φ )dφ 0 α 1 − W0 (t + φα )
2 α α α 2g0 W0 αξ + φα 1  
        φ 1
+ t − W0 (t + ) − (1 − t )dt
1  φ 
 1 ∗ α 1 − W0 (t + φα )
= W0 t + − t −

g0 (t )α dt r (φ )dφ . t
2 α 2g0 W0 t + φα
where we choose t∗ so W0 (t + φ φ
α ) > t for t < t and W0 (t + α ) < t
∗

Denote ∗
for t > t .
        Here t∗ solves
φ 1  φ  1   
H = W0 t + − t  −

g0 (t )dt . φ φ
α 2 α 2g0 W0 t + φα 1
t+ +3− (t + − 1 )2 + 8 = t.
4 α α
Then we finally have the following expression for the expected
buyer profit This can be simplified to t 2 − (2 + φ φ
α )t + α = 0 with a solution
      
φ 2
Eξ ,φ , (B ) = αH r ( φ )d φ + E − CB (α ). (A10) 1φ 1 φ
α 2 t∗ = 1 + − + 4.
2α 2 α
The first order condition for the optimal choice of α is
Now we can proceed numerically to find the solution α ∗ which
    
φ φ φ solves
  
H − H r (φ )dφ = CB (α ).
α α α D
φ φ  φ 1
H( ) − H d φ = 0. (A11)
α∗ α∗ α∗ D
 there is a solution α > 0. It is enough
We want to show that ∗ 0

to establish that α H φ is increasing for small α > 0, since then Now

α  
the expected profit (i.e., Eq. (A10)) is increasing for small α . This is φ 1
W0 (t + )−t −
equivalent to showing that H(z) > zH (z) for z → ∞. α 1 − W0 (t + φα )

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Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
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ARTICLE IN PRESS [m5G;December 17, 2019;18:59]

14 C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx

   (1 ) (1 )
G j (yi −y j +η j )
1 φ φ since = y(j1 ) − c j (z∗j ), a large value y(j1 ) implies a
= −3t + +3− (t + − 1 )2 + 8 (1 ) (1 )
g j (yi −y j +η j )
4 α α
large value of the fraction and this can only occur when yi(1 ) −
4 y(j1 ) + η j is close to its upper bound Uj . Hence we may assume
−   
that, for yi(1 ) chosen large enough, yi(1 ) − y(j1 ) + η j > U j −  . Now
4− t + φα + 3 − (t + φ
α − 1) + 8
2
notice that yi(2 ) (derived from y(j1 ) ) will also be large. Exactly the
   same argument will also imply that y(j1 ) − yi(2 ) + ηi > Ui −  , for
1 φ φ
= 5 − 5t − − 3 (t + − 1 )2 + 8 . yi(1 ) chosen large enough. Adding these inequalities gives
4 α α
yi(2) + Ui + U j − 2 < yi(1) + ηi + η j .
Similarly
  Together with (A12) this shows yi(2 ) < yi(1 ) as we require.
φ 1
t − W0 (t + ) − We write {yi(n ) } and {y(jn ) } for the decreasing sequences of
α 1 − W0 (t + φα )
prices for the two players. Then there are limit points for both se-
   quences, which we write as yi(∞ ) and y(j∞ ) . Since yi(n ) is the best
1 φ φ
= −1 + t − 3 − (t + − 1 ) + 8 . 2 response to y(jn−1 ) and vice versa it is easy to see from continuity
4 α α
that yi(∞ ) and y(j∞ ) are an equilibrium pair.
Thus
  0   Proof of Theorem 2:
φ φ φ
8H = 5 − 5t − − 3 (t + − 1 )2 + 8 (1 + t )dt
α −1 α α We set δi = Ri − Ri j and 
δ j = Rji − Rj . Let W
 = z ∗ − z ∗ − y∗ + y∗
i j i j
then (using symmetry) we can rewrite (7.1) and (7.2) as
  

 +  +
t∗
φ φ G(W δi ) = y∗i − ci (zi∗ ) g(W δi ), (A13)
+ 5 − 5t − − 3 (t + − 1 )2 + 8 (1 − t )dt
0 α α and

    +
1 − G(W  +
δ j ) = y∗j − c j (z∗j ) g(W δ j ). (A14)
1
φ φ
+ −1 + t − 3 − (t + − 1 )2 + 8 (1 − t )dt .  we obtain
t∗ α α Thus using the equation defining W

 +
G(W  +
δi ) 1 − G(W δj)
Substituting t∗ into the above equation and then substituting −  + z ∗ − z ∗ + c j ( z ∗ ) − ci ( z ∗ ).
= −W
H( φ α ∗ = 0.124188D.  +
g(W δi )  +
g(W δj)
i j j i
α ) into Eq. (A11), numerically, we can find that
The buyer’s expected utility is (A15)
 
φ This equation can be used to find W .
E (B ) = α H r ( φ )d φ + E ( )
α 2 We suppose that a particular set of errors are made and write
D     xi = εi − εi j and x j = ε ji − ε j . Thus  δi = Ri − R j + xi and 
δ j = Ri −
φ 1  
= α∗H ∗ dφ + E R j + x j . By writing W (xi , x j , φ ) for W + Ri − R j we will make the
0 α D 2
dependence on the parameter φ and on the errors xi , xj explicit.
= E ( )/2 − 0.201620D. Thus W  (x , x , φ ) is the value of w solving
i j

G ( w + xi ) 1 − G ( w + x j )
Proof of Lemma 1: − = φ − w.
g( w + x i ) g( w + x j )
We consider the solution to (7.1) as we make changes to yj Notice that the definition of W0 (xi , xj , φ ) makes it equivalent to
and track the resulting change in y∗i . Suppose that when yj de-  (x , x , φ ), but defined using G not G. We have
W i j 0
creases, y∗i either remains the same or increases. Then y j − y∗i +
ηi decreases, and hence from our assumption on the derivative, G0 (W0 (xi , x j , φ ) + xi ) 1 − G0 (W0 (xi , x j , φ ) + x j )
−
Gi (y j −y∗i +ηi ) 0 (xi , x j , φ ) + xi )
g0 (W g0 (W0 (xi , x j , φ ) + x j )
gi (y j −y∗i +ηi )
decreases. But this fraction is, from (7.1), equal to y∗i −
ci (zi ) which we are supposing does not decrease. Hence we have
∗ = φ − W0 (xi , x j , φ ).
established a contradiction, and so y∗i must also decrease. The ar- Thus, since G(w ) = G0 (w/α ) and g(w ) = α1 g0 (w/α ),
gument also applies to y∗j defined from (7.2) as a function of yi .
Thus we have shown that each decrease in price by one sup- G(αW0 (xi , x j , φ ) + α xi ) 1 − G(αW0 (xi , x j , φ ) + α x j )
−
plier as the auction progresses will produce a decrease in price by g(αW0 (xi , x j , φ ) + α xi ) g(αW0 (xi , x j , φ ) + α x j )
the other. Suppose that supplier i makes the first bid. We want to = αφ − αW0 (xi , x j , φ ).
show that if this bid is high enough then player i’s next bid will
Hence we have shown that
be lower (which is enough to kick off the alternating sequence of
decreasing bids). First note that  (α xi , α x j , αφ ) = αW0 (xi , x j , φ ),
W
ηi + η j i − R
=R j − R
i j + R ji = εi − εi j which we can also express as
+ ε j − ε ji < Ui + U j − 2 (A12)  (xi , x j , φ ) = αW0 (xi /α , x j /α , φ /α ).
W
for  chosen small enough. For large yi(1 ) the choice of y(j1 ) from The profit made by the buyer is
(1 ) (1 )
(7.2) must also be large to ensure that yi − yj + η j > L j . Hence B = max(Ri + zi∗ − y∗i , R j + z∗j − y∗j ) − CB (α )
Please cite this article as: C. Qian and E. Anderson, Buyer’s optimal information revelation strategy in procurement auctions, European
Journal of Operational Research, https://doi.org/10.1016/j.ejor.2019.11.061
JID: EOR
ARTICLE IN PRESS [m5G;December 17, 2019;18:59]

C. Qian and E. Anderson / European Journal of Operational Research xxx (xxxx) xxx 15

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The remainder of the proof matches that for Theorem 1.
Supplementary material
Supplementary material associated with this article can be
found, in the online version, at doi:10.1016/j.ejor.2019.11.061
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