Edited by: PON_Staff, filed in: Business Negotiations, Daily, Financial Negotiations, Negotiation
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Adapted from “Negotiations Versus Auctions in Procurement,” first published in theNegotiation newsletter.
When developing procurement contracts, when should you hold an auction, and when should you negotiate? In a study of more than 4,000 private-sector construction contracts in Northern California between 1995 and 2000, researchers Patrick Bajari, Robert McMillan, and Steven Tadelis examined the differences between projects that were directly negotiated versus those that were up for auction. The researchers found that fixed-price contracts were much more likely to be transacted through auctions, while “cost plus” contracts (in which the supplier charges direct costs plus a negotiated profit margin) were virtually all negotiated.
Anecdotal discussions with procurement executives for very large corporations suggest a twist on this result. These executives argue that auctions are not needed for the simplest of commodities, since simultaneous negotiations have already succeeded in getting suppliers to sharpen their pencils. Rather, suppliers whose level of complexity is low to medium provide the most opportunity for auctions to outperform negotiations.
See more at: http://www.pon.harvard.edu/daily/business-negotiations/negotiation-or-an-auction/?mqsc=E06/15/10+7:30+AM
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