An Experimental Investigation of Procurement Auctions with Asymmetric Sellers

Abstract

E lectronic reverse auctions are a commonly used procurement mechanism. Research to date has focused on suppliers who are ex ante symmetric in that their costs are drawn from a common distribution. However, in many cases, a seller's range of potential costs depends on their own operations, location, or economies of scale and scope. Thus, understanding how different bidder types impact auction outcomes is key when designing an auction. This study reports the results of the first controlled laboratory experiment designed to compare prices between first-price and second-price procurement auctions for homogeneous goods when seller cost types are asymmetric and the number of bidders varies. The results indicate that first-price auctions generate lower prices regardless of market composition. The results also reveal that first-price auctions are at least weakly more efficient than second-price auctions despite the theoretical prediction that the reverse should hold in asymmetric auctions. Post hoc analysis of individual bidders' behavior in first-price auctions revealed evidence that bidders systematically underbid when their cost realizations were close to the lower bound. Furthermore, bidders adjust their behavior based on the type of the other bidders in the market in a manner inconsistent with theory. Consequently, adding a third bidder to a two-bidder market is not advantageous to the buyer unless that third bidder is a low-cost type.

Carrier Bidding Behavior in Truckload Spot Auctions

“…This is important because firms in many industries have different specializations (Penrose ; Aloysius et al. ), which could manifest itself in differential bidding behavior consistent with my results and, perhaps, in ways not considered in this research.…”

Overcoming Cost Disadvantages in Procurement Auctions

“…Within the current literature on PV asymmetric procurement auctions, several things are generally taken as true. First, results show that cost‐advantaged sellers will realize higher profits than cost‐disadvantaged sellers—in analytical (Maskin & Riley, 2000; Landsberger, Rubenstein, Wolfstetter, & Zamir, 2001), empirical (Flambard & Perrigne, 2006; Estache & Iimi, 2010), and experimental (Saini & Suter, 2015; Aloysius et al., 2016) approaches. In addition, because they start in inferior cost positions, cost‐disadvantaged sellers generally resort to very aggressive bidding, often submitting bids below their valuation in an effort to win (Pezanis‐Christou, 2002; De Silva et al, 2003; Güth et al, 2005; Flambard & Perrigne, 2006; Estache & Iimi, 2010) or gain a foothold in the market (Li & Philips, 2012).…”

“…The majority of the literature—and the theoretical results that follow—makes the strong assumption of seller symmetry, where all sellers are assumed to be alike in terms of cost and information (Aloysius, Deck, Hao, & French, 2016). In practice, however, the assumption of symmetric sellers may not be applicable because sellers often differ in terms of their cost structure (Laffont, Ossard, & Vuong, 1995), market experience (De Silva, Dunne, & Kosmopoulou, 2003), capacity availability (Jofre‐Bonet & Pesendorfer, 2003), proximity to buyer (Flambard & Perrigne, 2006), or access to information (Hendricks & Porter, 1988).…”

On Factors that Moderate the Effect of Buyer‐Supplier Experience on E‐Procurement Platforms

“…E‐procurement platforms have become the go‐to places for service procurement as of late (Rothkopf and Whinston 2007, Stoll and Zöttl 2017) and have significantly expanded the scope of traditional procurement auctions (Aloysius et al. 2016, Brosig‐Koch and Heinrich 2014, Haruvy and Katok 2013). Notably, on Freelancer and Upwork , millions of suppliers are completing projects worth billions of dollars for buyers located all over the world.…”

“…In recent years, the practice of sourcing services from global suppliers has become increasingly common, as evidenced by the growth of such popular eprocurement platforms as Upwork, Freelancer, and Guru. E-procurement platforms have become the go-to places for service procurement as of late (Rothkopf andWhinston 2007, Stoll andZöttl 2017) and have significantly expanded the scope of traditional procurement auctions (Aloysius et al 2016, Brosig-Koch and Heinrich 2014, Haruvy and Katok 2013. Notably, on Freelancer and Upwork, millions of suppliers are completing projects worth billions of dollars for buyers located all over the world.…”