How auctioneers set reserve prices in procurement auctions

Jason Shachat and Lijia Tan

European Journal of Operational Research, 2023, vol. 304, issue 2, 709-728

Abstract: We introduce a behavioral model that effectively predicts auctioneers’ reserve choice patterns in English clock auctions across varying reserve price formats (whether reserve prices are set ex-ante or ex-post auction events), number of bidders and the distribution of suppliers’ costs. In a two-parameter model, which we call Subjective Conditional Probability (SCP), auctioneers have subjective judgement of conditional probabilities. We theoretically show that the SCP explains two intuitive, but sub-optimal, reserve price setting patterns. It predicts and provides rationalizations for ex-ante reserve prices that decrease in the number of bidders and ex-post reserve prices that increase in the realized auction price. We conduct two experiments; one with a uniform cost distribution and another with a left-skewed cost distribution. We validate the SCP model internally and externally by comparing it to a wide range of models, including reduced form linear regression, risk aversion, anticipated regret model, and subjective probability judgement via in-sample and out-of-sample predictions. We conclude that the SCP has strong external validity across a variety of procurement environments.

Keywords: Behavioural OR; Auctions/bidding; Ex-ante reserve price; Ex-post reserve price (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:304:y:2023:i:2:p:709-728

DOI: 10.1016/j.ejor.2022.04.025

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