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Procurement auctions with avoidable fixed costs: an experimental approach

  • Larson, Nathan
  • Elmaghraby, Wedad

Bidders in procurement auctions often face avoidable fixed costs. This can make bidding decisions complex and risky, and market outcomes volatile. If bidders deviate from risk neutral best responses, either due to faulty optimization or risk attitudes, then equilibrium predictions can perform poorly. In this paper, we confront laboratory bidders with three auction formats that make bidding difficult and risky in different ways. We find that measures of `difficulty' provide a consistent explanation of deviations from best response bidding across the three formats. In contrast, risk and loss preferences cannot explain behavior across all three formats.

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File URL: http://mpra.ub.uni-muenchen.de/32163/1/MPRA_paper_32163.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32163.

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Date of creation: 2008
Date of revision: 2011
Handle: RePEc:pra:mprapa:32163
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  1. Scott E. Page, 1996. "Two measures of difficulty (*)," Economic Theory, Springer, vol. 8(2), pages 321-346.
  2. Plott, Charles R., 1996. "Laboratory Experimental Testbeds: Application to the PCS Auction," Working Papers 957, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  4. Paul Klemperer, 2000. "What Really Matters in Auction Design," Economics Series Working Papers 2000-W26, University of Oxford, Department of Economics.
  5. Hobbs, Benjamin F, et al, 2000. "Evaluation of a Truthful Revelation Auction in the Context of Energy Markets with Nonconcave Benefits," Journal of Regulatory Economics, Springer, vol. 18(1), pages 5-32, July.
  6. Page, Scott E, 1996. "Two Measures of Difficulty," Economic Theory, Springer, vol. 8(2), pages 321-46, August.
  7. Anthony M. Kwasnica & John O. Ledyard & Dave Porter & Christine DeMartini, 2005. "A New and Improved Design for Multiobject Iterative Auctions," Management Science, INFORMS, vol. 51(3), pages 419-434, March.
  8. Terry Jones & Stephanie Forrest, 1995. "Fitness Distance Correlation as a Measure of Problem Difficulty for Genetic Algorithms," Working Papers 95-02-022, Santa Fe Institute.
  9. Goeree, Jacob K. & Holt, Charles A., 2010. "Hierarchical package bidding: A paper & pencil combinatorial auction," Games and Economic Behavior, Elsevier, vol. 70(1), pages 146-169, September.
  10. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers 02004, Stanford University, Department of Economics.
  11. repec:cup:cbooks:9780521747387 is not listed on IDEAS
  12. Cramton, Peter, 1998. "Ascending auctions," European Economic Review, Elsevier, vol. 42(3-5), pages 745-756, May.
  13. Peter Cramton & John McMillan & Paul Milgrom & Bradley Miller & Bridger Mitchell & Daniel Vincent & Robert Wilson, 1998. "Simultaneous Ascending Auctions with Package Bidding," Papers of Peter Cramton 98cra2, University of Maryland, Department of Economics - Peter Cramton.
  14. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September.
  15. Van Boening, Mark V & Wilcox, Nathaniel T, 1996. "Avoidable Cost: Ride a Double Auction Roller Coaster," American Economic Review, American Economic Association, vol. 86(3), pages 461-77, June.
  16. Michael H. Rothkopf & Aleksandar Peke\v{c} & Ronald M. Harstad, 1998. "Computationally Manageable Combinational Auctions," Management Science, INFORMS, vol. 44(8), pages 1131-1147, August.
  17. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
  18. Yechiam, Eldad & Busemeyer, Jerome R., 2008. "Evaluating generalizability and parameter consistency in learning models," Games and Economic Behavior, Elsevier, vol. 63(1), pages 370-394, May.
  19. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
  20. Elena Katok & Alvin E. Roth, 2004. "Auctions of Homogeneous Goods with Increasing Returns: Experimental Comparison of Alternative "Dutch" Auctions," Management Science, INFORMS, vol. 50(8), pages 1044-1063, August.
  21. Peter Cramton & Steven Stoft, 2007. "Why We Need to Stick with Uniform-Price Auctions in Electricity Markets," Papers of Peter Cramton 07cpm, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
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