Design and Evaluation of Procurement Combinatorial Auctions

The main advantage of a procurement combinatorial auction (CA) is that it allows suppliers to express cost synergies through package bids. However, bidders can also strategically take advantage of this flexibility, by discounting package bids and "inflating" bid prices for single-items, even in the absence of cost synergies; the latter behavior can hurt the performance of the auction. It is an empirical question whether allowing package bids and running a CA improves performance in a given setting.Analyzing the actual performance of a CA requires evaluating cost efficiency and the margins of the winning bidders, which is typically private and sensitive information of the bidders. Thus motivated, in Chapter 2 of this dissertation, we develop a structural estimation approach for large-scale first-price CAs to estimate the firms' cost structure using the bid data. To overcome the computational difficulties arising from the large number of bids observed in large-scale CAs, we propose a novel simplified model of bidders' behavior based on pricing package characteristics. Overall, this work develops the first practical tool to empirically evaluate the performance of large-scale first-price CAs commonly used in procurement settings.In Chapter 3, we apply our method to the Chilean school meals auction, in which the government procures half a billion dollars' worth of meal services every year and bidders submit thousands of package bids. Our estimates suggest that bidders' cost synergies are economically significant in this application (~5%), and the current CA mechanism achieves high allocative efficiency (~98%) and reasonable margins for the bidders (~5%). We believe this is the first work in the literature that empirically shows that a CA performs well in a real-world application.We also conduct a counterfactual analysis to study the performance of the Vickrey-Clarke-Groves (VCG) mechanism in our empirical application. While it is well known in the literature that the VCG mechanism achieves allocative efficiency, its application in practice is at best rare due to several potential weaknesses such as prohibitively high procurement costs. Interestingly, contrary to the recent theoretical work, the results show that the VCG mechanism achieves reasonable procurement costs in our application. Motivated from this observation, Chapter 4 addresses such apparent paradox between the theory and our empirical application. Focusing on the high procurement cost issue, we study the impact of competition on the revenue performance of the VCG mechanism using an asymptotic analysis. We believe the findings in this chapter add useful insights for the practical usage of the VCG mechanism.