Procurement Mechanisms for Assortments of Differentiated Products

Abstract

Many procurement agencies around the world construct assortments of differentiated products from which consumers can buy from. A leading example is framework agreements, a type of procurement mechanism commonly used by governments. This type of practice is studied head on. The authors introduce a mechanism design formulation of the procurement agency’s problem and solves it under progressively more realistic implementation constraints. The results show how restricting entry of close-substitute products into the assortment can increase price competition, reducing spending significantly, without much damage to the variety offered to consumers. Furthermore, the results have practical implications that can be used by procurement agencies to increase consumer surplus and have already been used to redesign FAs in the Chilean government.