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An Experimental Investigation of Auctions and Bargaining in Procurement

Shachat, J.; Tan, L.

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Authors

L. Tan



Abstract

In reverse auctions, buyers often retain the right to bargain further concessions from the winners. The optimal form of such procurement is an English auction followed by an auctioneer's option to engage in ultimatum bargaining with the winners. 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 of the Bayesian posteriors, calculated using a formulation similar to a commonly used probability weighting function. We further test the robustness of the experimental results and the subjective posterior explanation with three additional experimental treatments.

Citation

Shachat, J., & Tan, L. (2015). An Experimental Investigation of Auctions and Bargaining in Procurement. Management Science, 61(5), 1036-1051. https://doi.org/10.1287/mnsc.2013.1880

Journal Article Type Article
Acceptance Date Oct 23, 2013
Online Publication Date May 12, 2014
Publication Date May 1, 2015
Deposit Date Oct 13, 2014
Publicly Available Date Oct 14, 2014
Journal Management Science
Print ISSN 0025-1909
Electronic ISSN 1526-5501
Publisher Institute for Operations Research and Management Sciences
Peer Reviewed Peer Reviewed
Volume 61
Issue 5
Pages 1036-1051
DOI https://doi.org/10.1287/mnsc.2013.1880
Keywords Auction, Bargaining, Experiment, Subjective posterior.
Public URL https://durham-repository.worktribe.com/output/1443932

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