Comparing Open and Sealed Bid Auctions: Evidence from Online Labor Markets

Information Systems Research (ISSN 1526-5536 online, Forthcoming)

NET Institute Working Paper No. 13-05

21 Pages Posted: 8 Oct 2013 Last revised: 10 Dec 2015

See all articles by Yili Hong

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business

Chong (Alex) Wang

City University of Hong Kong

Paul A. Pavlou

Temple University - Department of Management Information Systems; Temple University - Department of Strategic Management

Date Written: August 12, 2014

Abstract

Online labor markets are web-based platforms that enable buyers to identify and contract for IT services with service providers using Buyer-Determined (BD) auctions. BD auctions in online labor markets either follow an open or a sealed bid format. We compare open and sealed bid auctions in online labor markets to identify which format is superior in terms of obtaining more bids and a higher buyer surplus. Our theoretical analysis suggests that the relative advantage of open versus sealed bid auctions hinges on the role of reducing service providers’ valuation uncertainty (difficulty in assessing the cost to execute a project) and competition uncertainty (difficulty in assessing the intensity of the competition from other service providers), which largely depends on the relative importance of the common value (versus the private value) component of the auctioned IT services, calling for an empirical investigation to compare open and sealed bid auctions. Based on a unique dataset of 71,437 open bid auctions and 7,499 sealed bid auctions posted by 21,799 buyers at a leading online labor market, we find that, an average, albeit sealed bid auctions attract 18.4% more bids, open bid auctions offer buyers $10.87 higher surplus. Furthermore, open bid auctions are 55.3% more likely to result in a buyer’s selection of a certain service provider, 22.1% more likely to reach a contract (conditional on the buyer’s making a selection) with a provider, and they generate higher buyer satisfaction. In contrast to conventional wisdom that “the more bids the better” and industry practice of treating sealed bid auctions as a premium feature, our results suggest that the buyer surplus gained from the reduction in valuation uncertainty enabled by open bid auctions outweighs the buyer surplus gained from the higher competition uncertainty in sealed bid auctions, which renders open bid auctions a superior auction design in online labor markets.

Keywords: auction format, auction theory, open bids, sealed bids, valuation uncertainty, competition uncertainty, online labor markets, buyer surplus, auction performance

Suggested Citation

Hong, Yili and Wang, Chong and Pavlou, Paul A., Comparing Open and Sealed Bid Auctions: Evidence from Online Labor Markets (August 12, 2014). Information Systems Research (ISSN 1526-5536 online, Forthcoming); NET Institute Working Paper No. 13-05. Available at SSRN: https://ssrn.com/abstract=2335669 or http://dx.doi.org/10.2139/ssrn.2335669

Yili Hong (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://yilihong.github.io/

Chong Wang

City University of Hong Kong ( email )

Information Systems, College of Business
City Univercity of Hong Kong
Kowloon
Hong Kong

Paul A. Pavlou

Temple University - Department of Management Information Systems ( email )

1810 N. 13th Street
Floor 2
Philadelphia, PA 19128
United States

Temple University - Department of Strategic Management ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

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