An experimental investigation of auctions and bargaining in procurement

Shachat, Jason and Tan, Lijia (2012): An experimental investigation of auctions and bargaining in procurement.

Abstract

In reverse auctions, buyers often retain the right to bargain further concessions from the winner. The optimal form of such procurement is an English auction followed by an auctioneer's option to engage in ultimatum bargaining with the winner. We study behavior and performance in this procurement format using a laboratory experiment. Sellers closely follow the equilibrium strategy of exiting the auction at their costs and then accepting strictly profitable offers. Buyers generally exercise their option to bargain according to their equilibrium strategy, but their take-it-or-leave-it offers vary positively with auction prices when they should be invariant. We explain this deviation by modeling buyers' subjective posteriors regarding the winners' costs as distortions, calculated using a formulation of probability weighting, of the Bayesian posteriors. We show alternative models based upon risk aversion and anticipated regret can't explain these price dependencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Auction, Bargaining, Experiment, Subjective Posterior
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C34 - Truncated and Censored Models ; Switching Regression Models; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions

References

Amemiya, T. (1984): "Tobit models: A survey," Journal of Econometrics, 24(1-2), 3-61

Bulow, J., and P. Klemperer (1996): "Auctions versus negotiations," American Economic Review, 86(1), 18094.

Bulow, J., and J. Roberts (1989): ``The simple economics of optimal auctions," Journal of Political Economy, 97(5), 1060-90.

Cooper, D., and E. Dutcher (2011): ``The dynamics of responder behavior in ultimatum games: a meta-study," Experimental Economics, 14(4), 519-546.

Coppinger, V. M., V. L. Smith, and J. A. Titus (1980): ``Incentives and behavior in english, dutch and sealed-bid auctions," Economic Inquiry, 18(1), 1-22.

Cox, J. C., B. Roberson, and V. L. Smith (1982): ``Theory and behavior in single object auctions," in Research in Experimental Economics, ed. by V. L. Smith, vol. 2, pp. 1-43. JAI Press, Greenwich, CT.

Cox, J. C., V. L. Smith, and J. M. Walker (1988): ``Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, 1(1), 61-99.

Croson, R. (1996): ``Information in ultimatum games: An experimental study," Journal of Economic Behavior & Organization, 30(2), 197-212.

David, H. A. (1981): Order Statistics. John Wiley and Sons, Inc., New York, second edn.

Davis, A. M., E. Katok, and A. M. Kwasnica (2011): ``Do auctioneers pick optimal reserve prices?," Management Science, 57(1), 177-192.

Elmaghraby, W. (2007): ``Auctions within E-Sourcing Events," Production and Operations Management, 16(4), 409-422.

Engelbrecht-Wiggans, R., and E. Katok (2007): ``Regret in auctions: theory and evidence," Economic Theory, 33(1), 81-101.

Engelbrecht-Wiggans, R., and E. Katok (2009): ``A direct test of risk aversion and regret in first price sealed-bid auctions," Decision Analysis, 6(2), 75-86.

Filiz-Ozbay, E., and E. Y. Ozbay (2007): ``Auctions with Anticipated Regret: Theory and Experiment," American Economic Review, 97(4), 1407-1418.

Fischbacher, U. (2007): ``z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, 10(2), 171-178.

Goeree, J. K., C. A. Holt, and T. R. Palfrey (2002): ``Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, 104(1), 247-272.

Goeree, J. K., C. A. Holt, and T. R. Palfrey(2003): ``Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, 45(1), 97-113.

Greiner, B. (2004): ``An online recruitment system for economic experiments," in Forschung und wissenschaftliches Rechnen, ed. by K. Kremer, and V. Macho, vol. 63 of Ges. fur Wiss. Datenverarbeitung, pp. 79-93. GWDG Bericht.

Guth, W., R. Schmittberger, and B. Schwarze (1982): ``An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, 3(4), 367-388.

Harstad, R., and R. Nagel (2004): ``Ultimatum games with incomplete information on the side of the proposer: an experimental study," Cuadernos de Economa, 27, 37-74.

Hege, U., S. L. Slovin, M. B., and M. E. Sushka (2009): ``Equity and Cash in Intercorporate Asset Sales: Theory and Evidence," Review of Financial Studies, 22(2), 681-714.

Huck, S. (1999): ``Responder behavior in ultimatum offer games with incomplete information," Journal of Economic Psychology, 20(2), 183-206.

Kahneman, D., and A. Tversky (1979): ``Prospect theory: an analysis of decision under risk," Econometrica, 47(2), 263-91.

Krishna, V. (2009): Auction Theory. Academic Press, 2 edn.

Myerson, R. B. (1981): ``Optimal auction design," Mathematics of Operations Research, 6(1), 58-73.

Prelec, D. (1998): ``The probability weighting function," Econometrica, 66(3), 497-528.

Ratan, A. (2012): ``Prospect theoretic preferences in first-price auctions," Working paper, Monash University.

Salmon, T., and B. Wilson (2008): ``Second chance offers versus sequential auctions: theory and behavior," Economic Theory, 34(1), 47-67.

Shachat, J., and L. Wei (2012): ``Procuring commodities: first-price sealed-bid or English auctions?," Marketing Science, 31(2), 317-333.

Tunca, T. I., and Q. Wu (2009): ``Multiple sourcing and procurement process selection with bidding events," Management Science, 55(5), 763-780.

Wan, Z., and D. R. Beil (2009): ``RFQ Auctions with Supplier Qualification Screening," Operations Research, 57(4), 934-949.

Wan, Z., D. R. Beil, and E. Katok (Forthcoming): ``When does it pay to delay supplier qualification? theory and experiments," Management Science.