IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/42409.html
   My bibliography  Save this paper

An experimental investigation of auctions and bargaining in procurement

Author

Listed:
  • Shachat, Jason
  • Tan, Lijia

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.

Suggested Citation

  • Shachat, Jason & Tan, Lijia, 2012. "An experimental investigation of auctions and bargaining in procurement," MPRA Paper 42409, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:42409
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/42409/1/MPRA_paper_42409.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    2. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
    3. Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, vol. 55(5), pages 763-780, May.
    4. Richard Engelbrecht-Wiggans & Elena Katok, 2009. "A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions," Decision Analysis, INFORMS, vol. 6(2), pages 75-86, June.
    5. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
    6. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
    7. Ulrich Hege & Stefano Lovo & Myron B. Slovin & Marie E. Sushka, 2009. "Equity and Cash in Intercorporate Asset Sales: Theory and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 681-714, February.
    8. Jason Shachat & Lijia Wei, 2012. "Procuring Commodities: First-Price Sealed-Bid or English Auctions?," Marketing Science, INFORMS, vol. 31(2), pages 317-333, March.
    9. David Cooper & E. Dutcher, 2011. "The dynamics of responder behavior in ultimatum games: a meta-study," Experimental Economics, Springer;Economic Science Association, vol. 14(4), pages 519-546, November.
    10. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    11. Huck, Steffen, 1999. "Responder behavior in ultimatum offer games with incomplete information," Journal of Economic Psychology, Elsevier, vol. 20(2), pages 183-206, April.
    12. Zhixi Wan & Damian R. Beil & Elena Katok, 2012. "When Does It Pay to Delay Supplier Qualification? Theory and Experiments," Management Science, INFORMS, vol. 58(11), pages 2057-2075, November.
    13. Croson, Rachel T. A., 1996. "Information in ultimatum games: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 197-212, August.
    14. Coppinger, Vicki M & Smith, Vernon L & Titus, Jon A, 1980. "Incentives and Behavior in English, Dutch and Sealed-Bid Auctions," Economic Inquiry, Western Economic Association International, vol. 18(1), pages 1-22, January.
    15. Zhixi Wan & Damian R. Beil, 2009. "RFQ Auctions with Supplier Qualification Screening," Operations Research, INFORMS, vol. 57(4), pages 934-949, August.
    16. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    17. Amemiya, Takeshi, 1984. "Tobit models: A survey," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 3-61.
    18. Andrew M. Davis & Elena Katok & Anthony M. Kwasnica, 2011. "Do Auctioneers Pick Optimal Reserve Prices?," Management Science, INFORMS, vol. 57(1), pages 177-192, January.
    19. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2013. "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 5-62, March.
    20. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
    21. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    22. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    23. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
    24. Richard Engelbrecht-Wiggans & Elena Katok, 2007. "Regret in auctions: theory and evidence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 81-101, October.
    25. Zhixi Wan & Damian R. Beil, 2009. "RFQ Auctions with Supplier Qualification Screening," Post-Print hal-00471441, HAL.
    26. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    27. Timothy Salmon & Bart Wilson, 2008. "Second chance offers versus sequential auctions: theory and behavior," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 47-67, January.
    28. Cox, James C & Smith, Vernon L & Walker, James M, 1988. "Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 61-99, March.
    29. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    30. Emel Filiz-Ozbay & Erkut Y. Ozbay, 2007. "Auctions with Anticipated Regret: Theory and Experiment," American Economic Review, American Economic Association, vol. 97(4), pages 1407-1418, September.
    31. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shachat, Jason & Tan, Lijia, 2023. "How auctioneers set reserve prices in procurement auctions," European Journal of Operational Research, Elsevier, vol. 304(2), pages 709-728.
    2. Fabian Herweg & Marco A. Schwarz, 2018. "Optimal Cost Overruns: Procurement Auctions With Renegotiation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1995-2021, November.
    3. Matthew J. Walker & Elena Katok & Jason Shachat, 2023. "Trust and Trustworthiness in Procurement Contracts with Retainage," Management Science, INFORMS, vol. 69(6), pages 3492-3515, June.
    4. Shachat, Jason & Tan, Lijia, 2019. "How Auctioneers Set Ex-Ante and Ex-Post Reserve Prices in English Auctions," MPRA Paper 96225, University Library of Munich, Germany.
    5. Kris De Jaegher & Michal Soltes & Vitezslav Titl, 2023. "Easing Renegotiation Rules in Public Procurement: Evidence from a Policy Reform," CERGE-EI Working Papers wp757, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Wei-Shiun Chang & Timothy C. Salmon & Krista J. Saral, 2016. "Procurement Auctions With Renegotiation And Wealth Constraints," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1684-1704, July.
    7. Herweg, Fabian & Schwarz, Marco A., 2016. "Optimal Cost Overruns: Procurement Auctions and Renegotiation," CEPR Discussion Papers 11179, C.E.P.R. Discussion Papers.
    8. Vitali Gretschko & Martin Pollrich, 2022. "Incomplete Contracts in Multi-period Procurement," Management Science, INFORMS, vol. 68(7), pages 5146-5161, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhixi Wan & Damian R. Beil & Elena Katok, 2012. "When Does It Pay to Delay Supplier Qualification? Theory and Experiments," Management Science, INFORMS, vol. 58(11), pages 2057-2075, November.
    2. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    3. Andreas Roider & Patrick W. Schmitz, 2012. "Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 808-830, September.
    4. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Discrete clock auctions: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 15(2), pages 309-322, June.
    5. Shachat, Jason & Tan, Lijia, 2023. "How auctioneers set reserve prices in procurement auctions," European Journal of Operational Research, Elsevier, vol. 304(2), pages 709-728.
    6. Diego Aycinena & Hernán Bejarano & Lucas Rentschler, 2018. "Informed entry in auctions," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(1), pages 175-205, March.
    7. Pearson, Matthew & Schipper, Burkhard C., 2013. "Menstrual cycle and competitive bidding," Games and Economic Behavior, Elsevier, vol. 78(C), pages 1-20.
    8. Grundl, Serafin & Zhu, Yu, 2023. "Robust inference in first-price auctions: Overbidding as an identifying restriction," Journal of Econometrics, Elsevier, vol. 235(2), pages 484-506.
    9. Shachat, Jason & Tan, Lijia, 2019. "How Auctioneers Set Ex-Ante and Ex-Post Reserve Prices in English Auctions," MPRA Paper 96225, University Library of Munich, Germany.
    10. Andrew M. Davis & Elena Katok & Anthony M. Kwasnica, 2011. "Do Auctioneers Pick Optimal Reserve Prices?," Management Science, INFORMS, vol. 57(1), pages 177-192, January.
    11. Breitmoser, Yves, 2019. "Knowing me, imagining you: Projection and overbidding in auctions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 423-447.
    12. Brisset, Karine & Cochard, François & Le Gallo, Julie, 2015. "Secret versus public reserve price in an “outcry” English procurement auction: Experimental results," International Journal of Production Economics, Elsevier, vol. 169(C), pages 285-298.
    13. Jason Shachat & Lijia Wei, 2012. "Procuring Commodities: First-Price Sealed-Bid or English Auctions?," Marketing Science, INFORMS, vol. 31(2), pages 317-333, March.
    14. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    15. Ivanova-Stenzel, Radosveta & Salmon, Timothy C., 2008. "Revenue equivalence revisited," Games and Economic Behavior, Elsevier, vol. 64(1), pages 171-192, September.
    16. Söllner, Matthias, 2008. "Menschliches Verhalten in elektronischen Märkten," Bayreuth Reports on Information Systems Management 34, University of Bayreuth, Chair of Information Systems Management.
    17. repec:wyi:journl:002158 is not listed on IDEAS
    18. Llorente-Saguer, Aniol & Zultan, Ro’i, 2017. "Collusion and information revelation in auctions," European Economic Review, Elsevier, vol. 95(C), pages 84-102.
    19. Alexia Gaudeul, 2013. "Social preferences under uncertainty," Jena Economics Research Papers 2013-024, Friedrich-Schiller-University Jena.
    20. Audrey Hu & Liang Zou, 2008. "Auctions under Payoff Uncertainty: The Case with Heterogeneous Bidder-Aversion to Downside Risk," Tinbergen Institute Discussion Papers 08-044/1, Tinbergen Institute, revised 22 Apr 2008.
    21. Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2008. "Price formation in a sequential selling mechanism," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 832-843, September.

    More about this item

    Keywords

    Auction; Bargaining; Experiment; Subjective Posterior;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:42409. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.