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How auctioneers set reserve prices in procurement auctions

Shachat, Jason and Tan, Lijia (2022) 'How auctioneers set reserve prices in procurement auctions.', European Journal of Operational Research .

Abstract

We introduce a behavioral model that effectively predicts auctioneers’ reserve choice patterns in English clock auctions across varying reserve price formats (whether reserve prices are set ex-ante or ex-post auction events), number of bidders and the distribution of suppliers’ costs. In a two-parameter model, which we call Subjective Conditional Probability (SCP), auctioneers have subjective judgement of conditional probabilities. We theoretically show that the SCP explains two intuitive, but sub-optimal, reserve price setting patterns. It predicts and provides rationalizations for ex-ante reserve prices that decrease in the number of bidders and ex-post reserve prices that increase in the realized auction price. We conduct two experiments; one with a uniform cost distribution and another with a left-skewed cost distribution. We validate the SCP model internally and externally by comparing it to a wide range of models, including reduced form linear regression, risk aversion, anticipated regret model, and subjective probability judgement via in-sample and out-of-sample predictions. We conclude that the SCP has strong external validity across a variety of procurement environments.

Item Type:Article
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Available under License - Creative Commons Attribution 4.0.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1016/j.ejor.2022.04.025
Publisher statement:© 2022 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
Date accepted:19 April 2022
Date deposited:11 May 2022
Date of first online publication:25 April 2022
Date first made open access:11 May 2022

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