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Costly Bidding in Online Markets for IT Services

Author

Listed:
  • Eli M. Snir

    (Southern Methodist University, Cox School of Business, Dallas, Texas 75275-0333)

  • Lorin M. Hitt

    (University of Pennsylvania, The Wharton School, Philadelphia, Pennsylvania 19104)

Abstract

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets---the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%--40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.

Suggested Citation

  • Eli M. Snir & Lorin M. Hitt, 2003. "Costly Bidding in Online Markets for IT Services," Management Science, INFORMS, vol. 49(11), pages 1504-1520, November.
    • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:11:p:1504-1520
    DOI: 10.1287/mnsc.49.11.1504.20587
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    References listed on IDEAS

    as
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