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An experimental investigation of auctions and bargaining in procurement

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  • Jason Shachat

    ()
    (The Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

  • Lijia Tan

    ()
    (The Wang Yanan Institute for Studies in Economics, Xiamen University)

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.

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File URL: http://feel.xmu.edu.cn/RePEc/wpaper/An_Experimental_Investigation_of_Auctions_and_Bargaining_in_Procurement.pdf
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Bibliographic Info

Paper provided by Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory in its series Working Papers with number 1203.

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Length: 28 pages
Date of creation: 17 Oct 2012
Date of revision: 17 Oct 2012
Handle: RePEc:fee:wpaper:1203

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Keywords: Auction; Bargaining; Experiment; Subjective Posterior;

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References

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  5. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  6. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
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  16. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 367-388, December.
  17. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, Econometric Society, vol. 66(3), pages 497-528, May.
  18. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
  19. Timothy Salmon & Bart Wilson, 2008. "Second chance offers versus sequential auctions: theory and behavior," Economic Theory, Springer, Springer, vol. 34(1), pages 47-67, January.
  20. Richard Engelbrecht-Wiggans & Elena Katok, 2007. "Regret in auctions: theory and evidence," Economic Theory, Springer, Springer, vol. 33(1), pages 81-101, October.
  21. Emel Filiz-Ozbay & Erkut Y. Ozbay, 2007. "Auctions with Anticipated Regret: Theory and Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1407-1418, September.
  22. Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, INFORMS, vol. 55(5), pages 763-780, May.
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