How the auction design influences procurement prices: An experiment

Karl-Martin Ehrhart and Marion Ott

No 19-061, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: The targeted design of auctions has to take behavioral regularities into account. This paper 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 di erent 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 prediction, 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 (search for similar items in EconPapers)
JEL-codes: C92 D44 D91 H57 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-des, nep-exp and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:19061

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