The ability to estimate a supplier's marginal cost confers a strategic
competitive advantage to the buyer, whether in negotiations with
suppliers, in an auction setting, or when an auction is used to initiate
the process, which is then followed up with a traditional negotiation.
Focusing on electronic reverse auctions characterized by a one-shot,
first-price, sealedbid format, this article proposes an approach for
estimating a supplier's marginal cost. Specifically, we suggest a
two-stage model: In the first stage, empirical analysis is used to
predict the winning bid. In the second stage, a game-theory approach is
used to refine the outcome of the first stage to provide an estimate of
the supplier's marginal cost. To assess the model, we apply it to data
from a food and beverages company that carried out electronic auctions
to select suppliers for industrial maintenance services. We find that
our estimates are very close to those made by the suppliers and compare
favorably to the efficient marginal costs determined with the widely
used approach of data envelopment analysis. This also implies that after
selecting a supplier through an auction, the buyer can enhance
follow-up negotiations with the supplier by contrasting our model's
estimates of the marginal costs with the supplier's inefficiencies
detected with the data envelopment analysis. [PUBLICATION ABSTRACT]