An Experimental Investigation of Auctions and Bargaining in Procurement

28 Pages Posted: 3 Nov 2012

See all articles by Jason Shachat

Jason Shachat

Durham University

Lijia Tan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: October 17, 2012

Abstract

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.

Keywords: Auction, Bargaining, Experiment, Subjective Posterior

JEL Classification: C34, C92, D03, D44

Suggested Citation

Shachat, Jason and Tan, Lijia, An Experimental Investigation of Auctions and Bargaining in Procurement (October 17, 2012). Available at SSRN: https://ssrn.com/abstract=2170363 or http://dx.doi.org/10.2139/ssrn.2170363

Jason Shachat (Contact Author)

Durham University ( email )

Durham University Business School
Mill Hill Lane
Durham, Fujian DH1 3LB
United Kingdom

Lijia Tan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

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