Procuring Commodities: First Price Sealed Bid or English Auction?

Abstract

I use laboratory experiments to examine the relative performance of the English auction (EA) and the first price sealed bid auction (FPA) when procuring a commodity. The mean and variance of prices are lower in the FPA than in the EA. Bids and prices in EA agree with game theoretic predictions while they don't in the FPA. To resolve these deviations found in the FPA, I consider a mixture model with three bidding rules: constant absolute mark-up, constant percentage mark-up, and strategic best response. A dynamic specification is estimated as a hidden Markov model. Initially about three quarters of the subjects are strategic bidders, but over time the number of strategic bidders falls to below sixty-five percent. There is a corresponding growth in those who bid a constant absolute mark-up above realized cost. This model provides an explanation of the dynamics of the mean and variance of price. * Ernan Haruvy, J.Todd Swarthout, John Wooders, James C. Cox, Elana Katok, Mark Walker, Eric T Bradlow, an anonymous area editor, and especially two anonymous referees provided helpful comments on earlier drafts of the paper. The paper has benefitted from the comments of audience members in departmental seminars at Georgia State University, the University of Arizona, Xiamen University, and others. I would also like to thank the University of California, San Diego and the National University of Singapore for allowing me to conduct experiments in their facilities. I would also like to acknowledge the IBM TJ Watson Research Lab for financial support and use of their software. I thank Li-jia Wei for his outstanding research assistance.