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A Laboratory Investigation of Rank Feedback in Procurement Auctions

Author

Listed:
  • Wedad J. Elmaghraby

    () (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Elena Katok

    () (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Natalia Santamaría

    () (Departamento de Ingeniería Industrial, Universidad de Los Andes, Bogotá D.C., Colombia)

Abstract

A popular procurement auction format is one in which bidders compete during a live auction event but observe only the rank of their own bid and not the price bids of their competitors. We investigate the performance of auctions with rank feedback in a simple setting for which analytical benchmarks are readily available. We test these benchmarks in the laboratory by comparing the performance of auctions with rank-based feedback to auctions with full-price feedback as well as to auctions with no price feedback (sealed-bid auctions). When bidders are risk-neutral expected-profit maximizers, the buyer's expected costs should be the same under rank and full-price feedback; moreover, expected buyer costs should be the same as in a sealed-bid auction. However, when we test this theoretical equality in a controlled laboratory setting we find that, consistent with practitioners' beliefs but contrary to our model, rank feedback results in lower average prices than full-price feedback. We identify two behavioral reasons for the difference. The first explanation is based on the similarity of the bidders' problem in a sealed-bid first-price auction and an open-bid auction with rank feedback. The second explanation incorporates the use of jump bids motivated by bidder impatience.

Suggested Citation

  • Wedad J. Elmaghraby & Elena Katok & Natalia Santamaría, 2012. "A Laboratory Investigation of Rank Feedback in Procurement Auctions," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 128-144, January.
  • Handle: RePEc:inm:ormsom:v:14:y:2012:i:1:p:128-144
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    File URL: http://dx.doi.org/10.1287/msom.1110.0354
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    References listed on IDEAS

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    Cited by:

    1. Yigal Gerchak, 2016. "Procurement (Reverse) Auctions Where Service Providers have Official Ratings," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 18(04), pages 1-10, December.

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