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Auctions: pick the best bidder but for one dollar more than the second best bid

Wired, June 2009 at 110, describes Google’s auction method, one which could apply to legal departments when they put work out to bid for a fixed fee. The winner of a competitive bid would be selected to do the work for one thousand dollars more (or some other pre-determined increment) than the bid of the firm with the next-lowest offer. So if firm A proposes to handle all your immigration work for two years for $300,000 and firm B proposes to handle it for $320,000, you pick firm A and award the work at $301,000. This method reduces the winner’s curse (See my post of Jan. 14, 2007: winner’s curse.) and is more likely to reach a fair price. This technique is often referred to as a “second-price auction.”

I have criticized auctions for legal work, yet I strongly back competitive bidding processes and the second-price variant. To reconcile my positions, I have to make clear that what I do not like are electronic, online, real-time auctions for legal services of any complexity (See my post of May 21, 2007: auctions with 7 references.). I favor market discipline and information for fixed fee arrangements.

Other kinds of auctions exist, such as Vickrey-Clark-Groves (See my post of Feb. 20, 2007 #1: expressive bidding algorithms for bundles of services; Feb. 1, 2006: “double auctions” that match seller and buyer rankings as well as “unique bid” auctions; and May 23, 2008 #1: combinatorial algorithm auctions.).

Since that metapost in mid-2007, this blog has dropped the gavel on several more auction items (See my post of Jan. 14, 2008: competitive bids and market cost; Feb. 16, 2008: few references to auctions proves their unpopularity; May 2, 2008: Esq.-harmony to match law firms and law departments; Dec. 9, 2008 #4: online auction by Intel for patents in 2006;and April 9, 2009: eLaw Forum and a massive competitive bid.).

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One response to “Auctions: pick the best bidder but for one dollar more than the second best bid”

  1. Electra says:

    In this example though, wouldn’t the most competitive bid be 300K, so the work would be done for 301K? Or are you saying pick the #2 guy and pay him the BEST bid amount plus 1K. Most competitve bid, would be the lesser bid, I would assume…great thoughts though!