A Sequential Auction-Bargaining Procurement Model

One of the most important decisions that a firm faces in managing its supply chainis a procurement decision: selecting suitable suppliers among many potential compet-ing sellers and reducing the purchase cost. While both auction and bargaining havebeen extensively studied in the literature, the research that combines both auction andbargaining is limited. In this paper, we consider a combined auction-bargaining modelin a setting where a single buyer procures an indivisible good from one of many com-peting sellers. The procurement model that we analyze is a sequential model consistingof the auction phase followed by the bargaining phase. In the auction phase, the sellerssubmit bids, and the seller with the lowest bid is selected as the winning bidder. In thebargaining phase, the buyer audits the cost of the winning seller and then negotiateswith him to determine the final price. For this auction-bargaining model, we find asymmetric bidding strategy equilibrium for the sellers in a closed form, which is simpleto understand and closely related to the classical results in the auction and bargainingliterature. We also show that the auction-bargaining model generates at least as muchprofit to the buyer as the standard auction or sequential bargaining model.