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Procurement auctions with avoidable fixed costs: an experimental approach

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  • Larson, Nathan
  • Elmaghraby, Wedad

Abstract

Bidders in procurement auctions often face avoidable fixed costs. This can make bidding decisions complex and risky, and market outcomes volatile. If bidders deviate from risk neutral best responses, either due to faulty optimization or risk attitudes, then equilibrium predictions can perform poorly. In this paper, we confront laboratory bidders with three auction formats that make bidding difficult and risky in different ways. We find that measures of `difficulty' provide a consistent explanation of deviations from best response bidding across the three formats. In contrast, risk and loss preferences cannot explain behavior across all three formats.

Suggested Citation

  • Larson, Nathan & Elmaghraby, Wedad, 2008. "Procurement auctions with avoidable fixed costs: an experimental approach," MPRA Paper 32163, University Library of Munich, Germany, revised 2011.
    • Handle: RePEc:pra:mprapa:32163
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    References listed on IDEAS

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    More about this item

    Keywords

    Auctions; Experimental; Procurement; Synergies; Asymmetric Bidders; Learning; Optimization errors;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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