The beauty of Dutch: Ex-post split-award auctions in procurement markets with diseconomies of scale

Ex-post split-award auctions are frequently organized as combinatorial procurement auctions in which the demand for some quantity to be procured is split into multiple shares and suppliers can bid on individual shares and the package. With two shares the auction selects either a single- or dual-source allocation. Markets with diseconomies of scale make the environment strategically challenging, because suppliers need to coordinate on a split outcome in the efficient equilibrium. We provide an equilibrium analysis of three combinatorial formats, namely, the first-price sealed-bid, the Dutch and the Dutch-FPSB split-award auction. We show that, unlike in single-object auctions, first-price sealed-bid and Dutch combinatorial auction formats are not strategically equivalent. While the FPSB auction exhibits a coordination problem for bidders, the Dutch formats have only efficient equilibria. The price information revealed during the Dutch auction formats helps bidders coordinate. In markets with only two bidders equilibria involving high pooling prices emerge in all three formats. However, no such strategy exists anymore when the number of bidders exceeds the number of shares. As a result, qualifying one more supplier has a significant impact as the expected procurement costs are reduced substantially.