The Design of Optimal Pay-as-Bid Procurement Mechanisms

Problem definition: We consider the mechanism design problem of finding an optimal pay-as-bid mechanism in which the platform chooses an assortment of suppliers in order to balance the trade-off between two objectives: providing enough variety to accommodate heterogeneous buyers, yet at low prices.

Academic/practical relevance: Modern buying channels, including e-commerce and public procurement, often consist of a platform that mediates transactions. Frequently, these platforms implement simple and transparent mechanisms to induce suppliers’ direct participation, which typically results in pay-as-bid (or first-price) mechanisms where suppliers set their prices.

Methodology: We introduce a novel class of assortment mechanisms that we call k-soft reserves (k-SRs): if at least k suppliers choose a price below the soft-reserve price, then only those suppliers are added to the assortment; otherwise, all the suppliers are added.

Results: We show the optimality of k-SRs for a class of stylized symmetric models in order to derive the intuition behind the mechanics of these mechanisms. Then, through extensive numerical simulations, we provide evidence of the robustness of k-SRs in more general and realistic settings.

Managerial implications: Our results give intuitive and simple-to-use prescriptions on how to optimize pay-as-bid assortment mechanisms in practice, with an emphasis on public procurement settings.