Differentiated Bidders and Bidding Behavior in Procurement Auctions

Abstract

Why do bidders in buyer-determined procurement auctions often bid above the lowest observed bid over the course of the auction? Are such bidding patterns meaningful? In this research the authors propose that since bidders are differentiated in their value to the buyer and competition in these auctions is anonymous, bidders infer their potential quality advantage or disadvantage vis-à-vis their observation of competitive bids and incorporate this information into their responses and price bids. Using point-by-point bid data from two industrial procurement auctions the authors show that bidders appear to be making inferences about their own implied quality differentials and adjust their bidding strategies and bidding aggression accordingly. Specifically, the authors find that high quality bidders tend to be more aggressive in bidding against potentially higher quality competition and less aggressive when bidding against potentially lower quality competition. In contrast, low quality bidders appear aggressive regardless of their implied quality vis-à-vis the competition. Implications for management and auction design are discussed.

Keywords: Online reverse auctions, differentiated bidders, bidder quality, buyer-determined reverse auctions, industrial procurement, bidding behavior and aggression