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An experimental investigation of auctions and bargaining in procurement

  • 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)

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
File Function: 2012
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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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  1. Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, vol. 55(5), pages 763-780, May.
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  16. Ulrich Hege & Stefano Lovo & Myron B. Slovin & Marie E. Sushka, 2009. "Equity and Cash in Intercorporate Asset Sales: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 681-714, February.
  17. Coppinger, Vicki M & Smith, Vernon L & Titus, Jon A, 1980. "Incentives and Behavior in English, Dutch and Sealed-Bid Auctions," Economic Inquiry, Western Economic Association International, vol. 18(1), pages 1-22, January.
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  22. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
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