Procurement without Priors: A Simple Mechanism and its Notable Performance

TL;DR

This paper introduces a simple procurement mechanism that guarantees a positive fraction of social surplus without prior knowledge of suppliers' costs, applicable across various complex cost functions.

Contribution

It proposes a straightforward, prior-free mechanism sharing a fixed utility fraction, maximizing surplus guarantees in procurement and related nonlinear pricing problems.

Findings

Guarantees a positive social surplus fraction without prior cost information.

Optimal share choice maximizes surplus ratio guarantees.

Applicable to complex, nonlinear cost functions.

Abstract

How should a buyer design procurement mechanisms when suppliers' costs are unknown, and the buyer does not have a prior belief? We demonstrate that simple mechanisms - that share a constant fraction of the buyer utility with the seller - allow the buyer to realize a guaranteed positive fraction of the efficient social surplus across all possible costs. Moreover, a judicious choice of the share based on the known demand maximizes the surplus ratio guarantee that can be attained across all possible (arbitrarily complex and nonlinear) mechanisms and cost functions. Similar results hold in related nonlinear pricing and optimal regulation problems.