How does Bid Visibility Matter in Buyer-Determined Auctions? Comparing Open and Sealed Bid Auctions in Online Labor Markets

Online labor markets are platforms that facilitate Buyer-Determined (BD) auctions in which buyers can identify and hire service providers who bid to offer IT services. We examine the effect of bid visibility (i.e., open bid versus sealed bid) on the bidders’ entry strategies (number of bids and quality of bids) and auction performance (buyer surplus, contract probability, and buyer satisfaction). We first theoretically analyze equilibrium bidder entry, and we derive hypotheses on the effect of open bid versus sealed bid on bidder strategic entry and auction performance. Using a proprietary large-scale dataset that allows us to observe 1,816,886 bids from 106,147 open bid and 9,950 sealed bid auctions posted on Freelancer.com by 41,530 unique buyers, we find that, while sealed bid BD auctions receive more bids, open bid BD auctions consistently outperform sealed bid BD auctions in terms of the quality of bids and auction performance. Specifically, compared with sealed bid BD auctions, while open bid BD auctions attract 8.1% fewer bids, they receive 3.59% more bids from experienced service providers, they are 50% more likely to get contracted, and they result in at least 19% more in buyer’s surplus. These findings are robust to different econometric specifications and propensity score matching estimators. Our study suggests that empirically, BD auctions do not exhibit revenue equivalence across auction designs, as predicted in the literature. The performance difference is attributed to the “screening effect†of open bid BD auctions that helps filter out low quality, inexperienced, bidders. Notably, the additional bids in sealed bid BD auctions result from the lack of pre-evaluation self-screening, and they are thus unusable, if not harmful, to auction performance by increasing buyers’ bid evaluation costs. Contrary to conventional wisdom and industry practice that expect “the more bids, the better†, which favors sealed bid BD auctions, our results demonstrate that fewer bids (albeit of higher quality), and thus open bid BD auctions, are a preferred option for online labor markets.