An Experimental Investigation of Auctions and Bargaining in Procurement

Abstract

The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. AbstractIn reverse auctions, buyers often retain the right to bargain further concessions from the winners. The optimal form of such procurement is an English auction followed by an auctioneer's option to engage in ultimatum bargaining with the winners. 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 of the Bayesian posteriors, calculated using a formulation similar to a commonly used probability weighting function. We further test the robustness of the experimental results and the subjective posterior explanation with three additional experimental treatments.JEL classifications: C34; C92; D03; D44

Bounded Rational Bidding Decision for Land Auction in the Context of Real Estate Economic Transformation and Upgrading

“…We compare the bidding decisions under two different situations: first, all bidders follow the fully rational assumption and apply the expected utility theory as the basis of decision-making; second, consider the bounded rational behavior of bidders under realistic situations. As known, under full rationality assumptions bidders' expected utility is calculated using actual utility and objective probability, without considering subjective judgment, while in reality bidders are realistic people with risk preferences and attitudes in bidding decisions, and they make subjective evaluations of the utility generated by the auction 18,19 , and may also distort the probability of winning subjectively 20,21 . Otherwise, there would not be so many people buying lottery tickets.…”

Trust and Trustworthiness in Procurement Contracts with Retainage

“…12 Related auction models in which contract renegotiation leads to lower prices ex-post are considered by Waehrer (1995) and Wang (2000). Shachat and Tan (2015) consider an auction-bargaining mechanism in which sellers compete at an English auction to deliver an indivisible good to a buyer. They find in an experiment that re-negotiated prices are below the winning bid although, contrary to the Nash prediction, final and initial prices are positively correlated.…”

How auctioneers set reserve prices in procurement auctions

“…For example, Muttitt (2011) reports after an auction for the Rumaila oilfield in southern Iraq in 2009, the Iraqi government privately renegotiated with the winning BP/CNPC consortium. Shachat & Tan (2015) report that in 2012, the Hunan Province (China) Procurement Center made over 90 0 0 orthopedic related purchases also using this format. While there are inevitably many ways in which ex-post auction negotiations are conducted, we proceed assuming that the auctioneers in all cases have a limit price, potentially implicit, beyond which they walk away from the po-tential transaction.…”