Effects of Information Revelation Policies Under Cost Uncertainty

Abstract

T he paper presents insights regarding the key learning-related factors a buyer should consider when deciding the extent to which information about bids is revealed in a procurement auction context. It offers the insights by analyzing the following two first-price sealed-bid policies in a private-value sequential auction with no winner dropouts: (i) iis, where only the winner's bid is revealed, and (ii) cis, where all bids are revealed. Our analysis identifies two important learning effects-the extraction and the deception effects-as having significant welfare implications. Both these effects arise because of a bidder's desire to gain an informational advantage relative to his competitors, but their manifestations are different. The extraction effect occurs because of a bidder's incentive to learn about his competitors, and the deception effect is a consequence of the incentive to prevent an opponent from gaining the information. Both effects lead to higher bid prices, and either may be dominant from a procurer surplus standpoint. With the deception effect, social welfare can decrease even when the number of suppliers increases, a result that is counterintuitive. The paper also discusses how insights regarding the learning effects might apply to other policies.

Effect of Auction Design on Bidder Entry: Evidence from An Online Labor Market

“…With regard to information revelation, Kannan [16] found that whether the Complete Information Setting (CIS) leads to a higher buyer surplus than Incomplete Information Setting (IIS) or not is still an inconclusive question. However, his study merely focuses on the competition information revelation instead of the task requirement or demand information.…”

On Evaluating Information Revelation Policies in Procurement Auctions: A Markov Decision Process Approach

“…In Kannan and Krishnan (2003), we set T = 2 and = 1 with a view to compare the same two policies using a framework where heterogeneous suppliers with different cost structures are unaware of their opponents' cost structure but are aware of the total number of competitors. Even under coststructure uncertainty, suppliers in iip behave in a manner similar to that under market-structure uncertainty.…”

“…Unfortunately, this is not the case (see Table 3). The problem studied in our current paper is equivalent to introducing market-structure uncertainty to the cost-structure uncertainty framework considered in Kannan and Krishnan (2003). However, the analysis under cost-structure uncertainty, even when the total number of participating suppliers is fixed, is executed numerically in Kannan and Krishnan (2003).…”

“…The impact of revelation policies on the expected price paid by the procurer 2 is different under marketstructure uncertainty from that under cost-structure uncertainty (see Arora et al 2007, Kannan 2003, necessitating the analysis involving both types of uncertainties. However, revelation policy comparisons are analytically intractable when both the uncertainties are jointly considered (Kannan 2003).…”

“…However, revelation policy comparisons are analytically intractable when both the uncertainties are jointly considered (Kannan 2003). To overcome the problem, we develop an alternate approach that combines ideas from economics and the distributed learning literature to characterize the bidding behavior of suppliers in the marketplace.…”