Tim’s objection is that buyers use auctions to impose terms on suppliers rather than engage in dialogue.

As a data guy, I’m a big fan of auctions because they provide a controlled environment to collect and disseminate information – sellers see what their competition is willing to do and buyers get an overview of the market.

Nevertheless, I agree with a lot of what Tim says because auctions create information flow in only 2 of the 3 possible directions. Data flows from supplier to supplier and from supplier to buyer but it does not flow from buyer to supplier.

This can create a situation that I will call the Incumbent’s Curse. It’s the other side of the coin from the Winner’s Curse. In the winner’s curse, the winning respondent in a tender finds that, in the heat of the auction, they have paid way too much. In the Incumbent’s Curse, the incumbent supplier cannot win the tender because they know how damn expensive this buyer is to service.

Imagine a supplier who delivers products to offices. In the spec in the tender, the buyer has not mentioned that it takes 30 minutes to get through security and that deliveries can only take place between 7:30am and 8:00am. The incumbent knows this and knows that this adds 1.5% to the cost of servicing the contract. The other respondents do not know this and have a 1.5% “advantage” in the auction. The incumbent loses the contract. The winner unwittingly shaves 1.5% from their margin.

Perhaps we need an auction facility that encourages a three-way dialogue.