Game theory in procurement Game theory: the analysis of rational behavior in situations of strategic interaction. Strategic interaction: the behavior of the other ‘player’ influences my ‘pay off’ The art of strategic decision making is acquired by experience Game theory is a method to use experience systematically Game: Players: people/companies/counties o Who are rational and have at least 2 strategies Strategies: one action o Or a set of actions Payoff o Every possible outcome of the game results in a payoff for each player Rules o Often implicit in the strategies and payoffs Equilibrium: solution of a game no player has an incentive to deviate from their strategy question whether a player has an incentive to deviate from his strategy in order to reach a better payoff Find the equilibrium by analyzing incentives of the players Prisoner’s dilemma: is een begrip uit de speltheorie als voorbeeld van de relatieve voordelen van samenwerken en niet samenwerken. Het spel kent twee spelers; Het spel is simultaan: beide spelers moeten tegelijkertijd beslissen; Het spel is non-coöperatief: er is geen contact tussen de spelers; Het spel levert een resultaat op dat niet het gunstigste is, beide spelers kunnen een beter resultaat behalen. Prisoner dilemma doorbreken/verzwakken d.m.v.: Sociale druk Communicatie en afspraken tussen partijen (afdwingbaar) Repeated prisoner dilemma: wanneer een prisoner's dilemma-situatie herhaald wordt. Hierbij dient men niet alleen rekening te houden met een enkel spel, maar ook met de strategie van spelers in vervolgsituaties. Met name wanneer het aantal spelronden onbekend is, kan een coöperatieve strategie lucratiever zijn. Mechanism design sets rules on how players must behave in order to achieve a desired target. A Mechanism is a set of rules/incentives to control player behavior. Bringing in other players/changing the game Changing the size of the pie (bundling) o Across business (new+running business) o Over time (multi-year contracts) Changing the actions of suppliers o Enlarge time periods between negotiations o Awarding process in which deviation is detectable Changing the pie at stake: asymmetric shares o Asymmetric shares: 80%/20% is better than Bargaining theory (onderhandelingstheorie) the branch of game theory dealing with the analysis of bargaining problems, through game theoretic situations, where parties repeatedly make offers to each other which they either accept or reject the theory itself is highly formal. However the insight gained through these models can be used for concrete negotiation situations the ‘aim of the game’ is to put yourself in the other party’s shoes: how will the other party react if he was to receive this offer? Negotiation should start by enlarging the pie increased by factors which are either of common interest, or where the costs to one party are lower than the gains to the other. Several factors determine the distribution of the pie: information focal points alternatives commitment competition timing Information Own information Never disclose own interests and targets without reason Identify what information is valuable to others Share information which places you in a better postion Consider trading information Other player information Gather as much as you can What do their actions reveal Beware of ‘cheap talk’ and ‘exposure effect’ Evaluate whether information shared with you is truthful Incentivize others to share truthful info Focal points in procurement clean sheet pricing price developments (of input factors) corporate savings target last/recent year pricing benchmark pricing Application to target price: timing: who makes the first offer (first mover advantage) target price: justifiable target price might focus the negotiation towards a desirable outcome be aware of focal points set by the opposing party BATNA: Best Alternatives To a Negotiated Agreement Information about other party’s BATNA is strategic information. Improvi ng Reducin g Supplier’s strategy USP (innovation, brand name) Alternative business opportunities Alternative areas of business at same customer Leaving the market: exit strategy; if you can’t win, you lose Increase alternatives (competition) Qualify alternative suppliers Enable substitute technologies Consider exit strategy as option Make alternatives monetary comparable and define walk away point Manage incentives Bundling of project awareness Multy-year contracts Loss of alternatives/dependencies Awarding decision fixed before the negotiation (stakeholder – and customer requirement) Backwards compatibility required Preference for global footprint Commitment: Beneficial abandonment of flexibility Credible commitment to a process and its outcomes provides certainty to the other party, encouraging them to engage Commitment drives internal alignment and helps reach a unified position Non-compliance to commitment will severely damage reputation in future negotiations Credibility and reputation are built over time as actions are observed How can commitment be achieved: Burning bridges Firm policy Long-term relationship Contracts Most-favoured-customer clause Delegation Licensing Competition 3 key factors determine the expected negotiation results weak bargaining position: 1. Weak competition: pre-selection of 2 suppliers 2. Weak selection: both suppliers win part of the business 3. Weak incentives: awarded shares are similarly attractive 3 key factors determine the expected negotiation results strong bargaining positions: 1. Multiple, equally strong competitors: creation of competition and comparability despite complexity 2. Transparent and case-specific selection process: committed and multi-lateral negotiation process 3. Attractive business opportunity: maximum incentives to win the business Timing: Negotiating when cost drivers show favorable trends Are any of the companies under pressure of a deadline Are any of the negotiators under pressure of a deadline Is there any industry standard negotiation cycle 7 rules of bargaining theory: 1. Enlarge the pie 2. Acquire information 3. Provide incentives 4. Create commitment 5. Improve your BATNA 6. Increase competition 7. Negotiate at the right time Open Auctions: Reverse Dutch auction: is een veiling waarbij een product op een te hoge prijs wordt ingezet, waarna de prijs daalt totdat iemand akkoord gaat. Bijv. bloemenveiling. Onder meer bloemenveilingen en visafslagen werken op deze wijze. De veiling gaat als volgt: de bieders zitten bij elkaar en krijgen de partij van het product te zien die wordt geveild. Voor deze partij wordt een prijs vastgesteld op de grote veilingklok. Deze prijs begint hoog waarna de prijs daalt (wat te zien is op de klok). Die bieder die als eerste drukt (vroeger 'mijn' riep) koopt de partij. De kunst is om niet te vroeg te drukken want dan betaal je te veel, maar druk je te laat dan heeft een andere koper de partij al gekocht. Wanneer de prijs onder een bepaalde waarde zakt wordt de klok stilgezet en komt er geen transactie tot stand. Men zegt dan ook wel dat de partij is "doorgedraaid". Dit fungeert als een minimumprijs. An English auction is an open-outcry ascending dynamic auction. It proceeds as follows. o The auctioneer opens the auction by announcing a suggested opening bid, a starting price or reserve for the item on sale. o Then, the auctioneer accepts increasingly higher bids from the floor, consisting of buyers with an interest in the item. The auctioneer usually determines the minimum increment of bids, often raising it when bidding goes high. o The highest bidder at any given moment is considered to have the standing bid, which can only be displaced by a higher bid from a competing buyer. o If no competing bidder challenges the standing bid within a given time frame, the standing bid becomes the winner, and the item is sold to the highest bidder at a price equal to their bid. o If no bidder accepts the starting price, the auctioneer either begins to lower the starting price in increments, bidders are allowed to bid prices lower than the starting price, or the item is not sold at all, according to the wishes of the seller or protocols of the auction house Biddings Often unclear rules: who has to do what in order to get what? Award of contract after the bidding process, i.e. selection of suppliers according to price and additional criteria whose importance is unknown to suppliers prior to the bidding process Auctions Well-defined rules which are communicated to participating suppliers with reasonable notice before the start of the auction Award to contract including conditions (price, share etc.) as a result of the auction process The value of ownership evaluation Goal: Total Value of Ownership evaluation makes suppliers comparable via Comparison Prices Advantages: o Integration of TVO o Achieving transparency to the in- and outside world o Preserving continuity towards suppliers o Creating incentives o Increasing competition o Prudent risk taking
