A Comparison of Auctions and Multilateral Negotiations

Abstract

We compare first-price auctions to an exchange process that we term "multilateral negotiations." In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with privately known costs, and then plays the sellers off one another to obtain additional price concessions. Using the experimental method, we find that with four sellers, transaction prices are statistically indistinguishable in the two institutions, but with two sellers, prices are higher in multilateral negotiations than in first-price auctions. The institutions are equally efficient with two sellers, but multilateral negotiations are slightly more efficient with four sellers.

Auction Versus Negotiated Sale: Evidence from Real Estate Sales

“…If information on rival bids is not credible, the favorable negotiation position of one party may result in negotiated prices being higher than auction prices. In the experiments they conduct,, Thomas and Wilson (2002) find that prices are indistinguishable between multilateral negotiations and auctions when there are four sellers, but higher in multilateral negotiations when there are two sellers. Wang (1993) compares posted-price selling against auctions and concludes that auctions are preferred to posted-price selling when the value of the object is more dispersed 5 and for items with higher value.…”

“…Thus, the value of higher negotiation or bargaining strength is small compared to the value of using competition among the bidders to drive prices up (Bulow and Klemperer 1996). Thomas and Wilson (2002) argue that a buyer's ability to credibly reveal rival offers to sellers influences the revenue obtained from two different mechanisms -multilateral negotiations and first-price auctions. If information on rival bids is not credible, the favorable negotiation position of one party may result in negotiated prices being higher than auction prices.…”

“…As will be described in detail in the next section, these studies arrive at different conclusions. In the literature relating to business acquisitions, the results are also mixed as to whether auctioning off a company or selling it through a sequential process is more profitable Klemperer 1996, 2009; Thomas and Wilson 2002;Boone and Mulherin 2007). Studying the price difference in relation to product types, Wang (1993) and Bulow and Klemperer (2009) consider auctions to generate higher revenue when the asset (bidders' values) has higher price dispersion.…”

“…Studying the price difference in relation to product types, Wang (1993) and Bulow and Klemperer (2009) consider auctions to generate higher revenue when the asset (bidders' values) has higher price dispersion. With regard to price differences across market conditions, Bulow and Klemperer (1996) conclude that auctions perform better when there are more bidders, Boone and Mulherin (2007) find the wealth effects for target shareholders to be comparable in auctions and negotiations, and Thomas and Wilson (2002) find prices to be higher in multilateral negotiations when the number of sellers is small.…”

More Information, More Ripoffs: Experiments with Public and Private Information in Markets with Asymmetric Information

“…However, two key differences between their experimental designs and ours are worth noting: All of our markets feature goods of unknown quality, and our haggling institution (TSMN) allows participants to exchange messages consisting of words and prices, not just prices. Thomas and Wilson (2002) empirically compare one-sided multilateral negotiations (of messages consisting of words and prices) with traditional auction mechanisms with independent private values, but again their goods are of known quality. Cason and Gangadharan (2002) investigate markets with asymmetric information using posted-offer treatments that allow for no reputation formation, reputation formation, cheap talk signaling, and certification.…”