How the Auction Design Influences Procurement Prices: An Experiment

26 Pages Posted: 28 Jan 2020

See all articles by Karl-Martin Ehrhart

Karl-Martin Ehrhart

University of Karlsruhe

Marion Ott

ZEW – Leibniz Centre for European Economic Research

Date Written: 2019

Abstract

The targeted design of auctions has to take behavioral regularities into account. This pa- per explores whether procurement auction formats can take advantage of bidders’ willingness- to-pay-willingness-to-accept disparity. In a laboratory experiment, we compare four different second-price auction formats for procuring a good. The four formats are a sealed-bid auction and three different descending-clock auctions. We assume that a bidder’s willingness-to-accept exceeds his willingness-to-pay and that, depending on the auction format, a bidder’s reference- state shifts such that the bidder’s perspective moves from a willingness-to-accept perspective towards a willingness-to-pay perspective, thus inducing aggressive bids. In line with the predic- tion, auction prices decline across the four formats. In particular, we observe the lowest prices in those two clock auction formats that, at every auction stage, select a bidder as the current leading bidder. We conclude that mechanisms influence the reference state and that auctions that foster reference-state shifts lead to lower payments for the buyer. These results support and generalize findings on sales auctions. However, not all of our findings on procurement auctions mirror findings on sales auctions. Bidders overbid in sealed-bid procurement auctions, which does not mirror the commonly observed overbidding in sealed-bid sales auctions.

Keywords: procurement auction, experiment, WTP-WTA disparity, reference-dependence

JEL Classification: D44, H57, D91, C92

Suggested Citation

Ehrhart, Karl-Martin and Ott, Marion, How the Auction Design Influences Procurement Prices: An Experiment (2019). ZEW - Centre for European Economic Research Discussion Paper No. 19-061, Available at SSRN: https://ssrn.com/abstract=3526022 or http://dx.doi.org/10.2139/ssrn.3526022

Karl-Martin Ehrhart (Contact Author)

University of Karlsruhe ( email )

Postbox
76128 Karlsruhe, DE 76128
Germany

Marion Ott

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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