Dual sourcing with price discovery

Abstract

We consider a (standard) reverse auction for dual sourcing and propose to determine both the providers' shares and the reserve price endogenously, depending on the suppliers' bids. Our benchmark considers a two-stage game of complete information. After a first round of bidding, the two most competitive suppliers advance to the second stage and compete again with a refined reserve price, which is based on the lowest price of the excluded providers. We show that at the first stage providers reveal their costs truthfully. At the second stage suppliers balance a trade-off between increasing their share and raising their mark up. Surprisingly, when discarded suppliers are competitive enough, the procedure not only allows taking advantage of dual sourcing but also generates lower procurement expenditures than a standard auction for sole sourcing. We also consider extensions of the benchmark model, including to situations in which providers have private information about their costs.