Robust procurement design

TL;DR

This paper develops a robust procurement mechanism design framework accounting for buyer uncertainty about seller costs and values, optimizing worst-case payoffs and exploring regulation strategies.

Contribution

It introduces a robust mechanism design approach that accounts for model uncertainty and compares regulation methods under these conditions.

Findings

Robust mechanisms increase procurement from less efficient sellers.

Quantity regulation can outperform price regulation under certain conditions.

Buyer’s optimal strategy depends on worst-case and expected payoff considerations.

Abstract

We study procurement design when the buyer is uncertain about both the value of the good and the seller's cost. The buyer has a conjectured model but does not fully trust it. She first identifies mechanisms that maximize her worst-case payoff over a set of plausible models, and then selects one from this set that maximizes her expected payoff under the conjectured model. Robustness leads the buyer to increase procurement from the least efficient sellers and reduce it from those with intermediate costs. We also study monopoly regulation and identify conditions under which quantity regulation outperforms price regulation.