Optimal Procurement Mechanisms for an Informed Buyer

Abstract

This paper studies a buyer (e.g., a government agency) offering a procurement contract to a number of privately informed suppliers. The buyer has private information about her demand for the product to be procured. The optimal mechanisms for all types of the buyer are examined. It is optimal for the buyer to reveal her demand information through the contract offer and use a first-price sealed-bid auction procedure to award the contract, announcing her reserve price in advance. Any second-price auction is shown to yield less expected surplus for the buyer than the optimal first-price auction does when the buyer's marginal willingness to pay decreases with quantity.

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