November 1, 2020

Looking for the perfect eAuction

By Patrick Chabannes

In the general indifference of the world of Purchasing and software publishers, Paul R.’s work on auctions. Milgrom and Robert B. Wilson’s work on auctions earned them the Nobel Prize in Economics. What are the practical consequences and how can such a common and beneficial practice for buyers and sellers be so misunderstood by purchasing professionals?

First of all, let us note that this work is part of a continuous increase in the millennial practice of auctions through the cross effect of Research and Practice. Improvements to auction theory and inventions of new auction formats clarify the functioning of auctions, the behavior of participants and propose practical applications with new auction formats such as the SMRA already adopted around the world.

The theoretical contributions of the Nobel Prize in Economics can be summarized in three key factors knowing that the establishment of the strategy of each participant will depend on his anticipation of the strategy of his competitors. Therefore, the more these factors are well defined and known, the more the auction will lead to mutual benefit.

  • the auction rules (format and allocation rule)
  • the object of the auction (a definition) with its estimated value (by all and individually by each of the bidders),
  • Uncertainty about the information possessed by some or all of the participants.

Based on these seemingly simple theoretical contributions, different auction formats are available to adapt to the markets. Consequently, auctions are not a game but require a knowledge of one’s Suppliers and of one’s market in order to buy at the best price from the most appropriate seller in complete transparency, always avoiding the winner’s curse, a cognitive mechanism that occurs when the winner has the impression of having sold below the estimated value, as can happen with the Dutch one.

The known formats are the Vickrey and its simple variant the sealed bid, the English and the Dutch with its Japanese or Brazilian variant. The new formats, designed to provide more security for both sellers and buyers, make it possible to make the most of the promises of markets with multi-attribution (transport, energy…) when each allocation can reduce the desire to win for some participants. The SMRA (Simultaneous Multiple Round Auction) format was invented by Milgrom & Wilson to solve its complex cases, the most well known of which is the sale of radio frequencies to US telecom operators as early as 1994. This success led Milgrom among others to create the Combinatorial Clock Auction and then the Incentive Auction.

Purchasing Department, Category Manager, Lead Buyers. Listen to the Royal Swedish Academy of Sciences underline that these new auction formats are a magnificent example of fundamental research inventions benefiting buyers, sellers and society as a whole. Auctioning serves your performance by allowing you :

  • to save time,
  • to have the lowest price with the best Supplier,
  • to offer all competitors transparent information on their market positioning,
  • Use the different strategies made available to you by your publisher,
  • Make sure to train your Suppliers on the rules,
  • Make everyone understand that this is not a game but a theorized practice,
  • Inform your Suppliers of the benefits of the auctions,
  • And finally push your Software Providers to integrate into their auction room the practical consequences of the latest fundamental research.

Lectori salutem, Patrick Chabannes
The mind likes what confirms its knowledge better than what contradicts it.” Gaston Bachelard.