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An Experimental Investigation of Auctions and Bargaining in Procurement

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  • Jason Shachat
  • Lijia Tan

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 o ers 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

  • Jason Shachat & Lijia Tan, 2013. "An Experimental Investigation of Auctions and Bargaining in Procurement," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:002055
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    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. Herweg, Fabian & Schwarz, Marco A., 2016. "Optimal Cost Overruns: Procurement Auctions and Renegotiation," CEPR Discussion Papers 11179, C.E.P.R. Discussion Papers.
    7. Vitali Gretschko & Martin Pollrich, 2022. "Incomplete Contracts in Multi-period Procurement," Management Science, INFORMS, vol. 68(7), pages 5146-5161, July.

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    More about this item

    Keywords

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

    JEL classification:

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

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