Coping with Costly Bid Evaluation in Online Reverse Auctions for IT Services

Online markets have dramatically decreased costs of search and communication for buyers. By contrast, costs of evaluating purchasing alternatives have become critical due to an overwhelming range of available options. When high, evaluation costs can offset potential gains from transactions and cause inefficiencies, e.g. by forcing buyers to abandon transactions without allocating contracts. While most previous studies treat evaluation costs as an exoge-nous factor, this study considers them endogenous. We identify several tactics (search, request for proposal preparation, budget announcement, bid filtering, and negotiation) that buyers at online markets can use to reduce their evaluation costs and hence influence project allocation. Using data from nearly 10 thousand transactions at a leading online marketplace for IT services, we show that buyers who use these tactics are more likely to allocate their project to a winner than buyers not using these tactics. Buyer experience also has a positive effect on allocation and, in addition, moderates the effectiveness of some of the tactics. As experience grows, budget announcement be-comes more effective in coping with evaluation costs and increases the likelihood of allocation, while the effectiveness of request for proposal preparation decreases. Together, these results shed more light on the buyer side of online reverse auctions, which leads to guidelines for improving the efficiency of online marketplaces.