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

42 Pages Posted: 23 Jul 2008

See all articles by U. L. Radkevitch

U. L. Radkevitch

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

E. van Heck

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

O. Koppius

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Date Written: 15 2008 7,

Abstract

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.

Keywords: evaluation costs, reverse auctions, online markets, IT services, outsourcing, buyer behavior, vendor selection

JEL Classification: L15, O32, M, D44, D81, D83

Suggested Citation

Radkevitch, Uladzimir and van Heck, Eric and Koppius, Otto, Coping with Costly Bid Evaluation in Online Reverse Auctions for it Services (15 2008 7,). ERIM Report Series Reference No. ERS-2008-039-LIS, Available at SSRN: https://ssrn.com/abstract=1170182

Uladzimir Radkevitch (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Eric Van Heck

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 2032 (Phone)
+31 10 408 9010 (Fax)

HOME PAGE: http://people.fbk.eur.nl/eheck/personal/

Otto Koppius

Rotterdam School of Management, Erasmus University ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 2032 (Phone)
+31 10 408 9010 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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