I have worked in the automotive aftermarket parts industry for thirteen years and have witnessed many changes within the industry. The most recent change took place in October 2013, when State Farm Insurance Company introduced an online parts ordering system called PartsTrader. The system is designed to force auto body repair shops to purchase parts from suppliers in an auction type environment. The auction is set up as a first-price, sealed-bid auction where each supplier submits a bid at the price they are willing to supply the parts to the repair shop for. The winner of the bid agrees to supply the parts to the repair shop for the amount they bid. This auction style purchasing allows State Farm to reduce their cost on the parts supplied for insurance claims.
The question arises, does the economic theory of auctions we read about in our text book actually work in the real world? In the case of PartsTrader the answer is yes. For State Farm it is allowing them to lower their costs on insurance claims. As a supplier in the auction system, our optimal bidding strategy has been to bid less than our perceived value for the products. This is consistent with the recommendations for a first-price, sealed bid auction. Following this strategy has allowed us to win bids we otherwise would not have won. However, because our marginal costs are higher compared to other suppliers in the market, we often lose sales we would have earned outside of the auction. For a supplier, who has a low marginal cost, the auction system works to their advantage because they can bid lower than other suppliers. Bidding low and maintaining low marginal costs allows a supplier to win jobs they otherwise would not have been able to outside of the auction system.
Although State Farm is the only insurance company to utilize an auction based ordering system, it is likely that others insurance companies, due to the success of PartsTrader, will make the switch to auction based ordering systems.