On the Trade-Off between Supplier Diversity and Cost-Effective Procurement

The current COVID-19 pandemic has highlighted the need to rely on a diverse pool of suppliers, besides achieving cost effectiveness. Common wisdom, however, holds that these two aims are in conflict. We propose complementing a share auction for dual sourcing with affirmative action to create an endogenous set-aside for a high-cost supplier. In our model more intensive affirmative action strengthens the targeted provider. This has the potential to level the playing field, inducing more competitive procurement overall. Our main result provides a condition under which the endogenous set-aside not only guarantees a very substantial share for the high-cost supplier, but also reduces the buyer's provision cost compared to a standard auction. We also illustrate how our approach can help reducing the severity and likelihood of health product shortages, such as those occurred during the recent COVID-19 outbreak.