Game theory in negotiations and auctions
Optimise purchasing and procurement using game theory
With rising energy costs, high inflation, substantial transport costs and scarce materials, procurement functions are currently facing enormous challenges when it comes to negotiations.
Therefore, leading procurement functions are increasingly turning towards using game theory to revolutionise their approach to negotiations. Our PwC procurement enthusiasts support your company in enriching your procurement negotiations with game-theoretical elements making them even more successful and efficient.
What does this look like in concrete terms? We jointly analyse and monitor behavioural patterns of the negotiating parties and maximise competitive pressure by applying tailored awarding mechanisms. This means that your procurement team does not negotiate with suppliers directly. Rather, suppliers compete directly with each other in auctions on the basis of pre-defined rules and transparent, comparable awarding criteria.
By applying game theory, procurement organisations can bring a new dynamic to negotiations with suppliers and achieve savings that would be impossible through conventional, bilateral negotiations.
We assist you in establishing game theory as part of your negotiating toolbox, in combining theory and practice, and in maximising the results from your award processes.
The 3C approach
Embed game theory principles sustainably within your company
To embed game theory within the procurement process, our game theory and procurement specialists have developed the 3C approach. This enables you to design tailored awarding mechanisms based on game theory across all types of product groups. The central components and requirements for this are:
Comparability: all decision parameters are taken into consideration and accounted for in monetary terms based on a bonus/malus evaluation. The offers from suppliers are made fully comparable. The award decision is then made on the basis of the total cost/value of ownership.
Commitment: the outcome of the award decision is completely open. All participating suppliers are permitted to make offers and can win the contract being auctioned on their own merits. Follow-up negotiations or vetoes in procurement committees? Not necessary.
Competition: a customised award mechanism is the key to any successful award process. The objective here is to identify and set the right incentives for bidders as well as to provide the corresponding signals. This maximises competitive pressure between the bidders and ensures the best possible result.
It is often the case that all three criteria are not fulfilled at the start of a project. This can nonetheless be remedied by cross-functional teams consisting of employees from the areas of procurement, technology, quality, logistics and sales.
Customised and effective support
- Screening & potential workshop
- Center of competence
- Training and coaching
Screening & potential workshop
The screening & potential workshop aims to identify areas where game theory can be applied and to develop an award pipeline. In addition, we reduce biases and inspire procurement staff to apply game theory in practice.
Center of competence
A center of competence (CoC) consists of an internal expert team that is responsible for organising and conducting complex negotiation mechanisms. We assist in building up and developing a CoC, including the relevant governance arrangements, customised processes, expert training events and the right auction tools.
Training and coaching
We conduct coaching and training events to develop your expert team for procurement and game theory. Only the right level of expertise can ensure long-term success in negotiations and awards. Our academic courses are held in cooperation with Prof. Dr. J. Philipp Reiss, Head of Department for Industrial Economics at the Karlsruhe Institute of Technology (KIT).
The right mindset
How your procurement team can embed game theory in negotiations
To start successfully, award processes have to be carried out with great enthusiasm. Once a procurement team has achieved major savings from a successful auction, they want to do it again and again. Such a success gets around and will inspire further employees to use game theory as a path to success.
It is important to ensure that your procurement function is not only equipped with knowledge but also with the reassurance it needs in the introductory phase of game-theory-based award optimisation. Only then, they will be comfortable to hand over decision-making authority to a firmly defined auction mechanism.
When implemented correctly, the method will spread throughout your entire organisation and will become a firmly established part of the cross-functional negotiation toolbox.
We look forward to getting in touch with you and showing how you can gain the upper hand in negotiations by firmly embedding game theory in your procurement organisation.
“Once procurement teams have conducted an award process based on game theory, they will always wish to do so again. They are the ideal multiplier and will spread their enthusiasm throughout your entire organisation.”
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