Split-Award Auctions: Insights from Theory and Experiments

We investigate procurement in a setting in which the buyer is bound by sourcing rules. Sourcing rules may limit the minimum and maximum amounts of business that can be awarded to a single supplier or dictate the minimum number of suppliers who are awarded business, thus necessitating split awards. The buyer announces the splits before the auction, and suppliers bid accordingly. We consider two auction formats: the sealed-bid first-price auction, and a version of the open-bid descending-price auction. We characterize the suppliers’ symmetric equilibrium bidding strategy for both formats and find that the two formats yield the same expected buyer’s cost. We characterize the cost of multisourcing, showing among other things that it is always costly for the buyer to split its award among more suppliers if the suppliers’ costs are regularly distributed, but that doing so can actually reduce the buyer’s expected auction payment if the suppliers’ costs are not regularly distributed. The results from controlled l...