Target versus budget reverse auctions: an online experiment using the strategy method

Reverse auctions are used in various fields by public or corporate buyers to purchase goods and services from multiple sellers at the best price. Unlike in selling auctions, in reverse auctions a budget constraint rather than a target quantity is often announced by the auctioneer. However, in auction theory no optimal bidding strategy has yet been found in the case when a budget constraint is announced. Here we compare the two auction formats in an online experiment with 329 participants. Weuse the strategy method to obtain participants' bidding strategies from which we run exhaustive simulations of auction outcomes. This innovative methodology allows to overcome the issue of randomness of the auction outcome related to bidders' values. When each bidder has a single unit to sell, from the buyer's perspective, we find that, on average, the budget-constrained auction format outperforms the target-constrained auction format.