Do Auction Parameters Affect Buyer Surplus in E-Auctions for Procurement?

Abstract

Although the initial euphoria about Internet-enabled reverse auctions has given way to a cautious but widespread use of reverse auctions in business-to-business (B2B) procurement, there is a limited understanding of the effect of auction design parameters on buyer surplus. In this paper, we study the effect of bidding competition, information asymmetry, reserve price, bid decrement, auction duration, and bidder type on buyer surplus. We collected field data on more than 700 online procurement auctions conducted by a leading auctioneer and involving procurement items worth millions of dollars. Consistent with the predictions of auction theory, the results indicate that bidding competition, reserve price, and information sharing affect buyer surplus. Unlike previous findings in the consumer-to-consumer context, we find that bid decrement and auction duration have no effect in B2B procurement auctions. Our results suggest that use of the rank-bidding format increases buyer surplus when incumbent suppliers participate in the auction. We discuss the theoretical and managerial implications of these findings for future research and for optimal design of online procurement auctions.

Keywords: Business Value of Information Technology, Supply Chain Management, Buyer Surplus, Reverse Auctions, Internet-enabled Procurement Auctions

JEL Classification: C93, M1, L22