An Investigation of the Average Bid Mechanism for Procurement Auctions

Wei-Shiun Chang (), Bo Chen () and Tim Salmon
Additional contact information
Wei-Shiun Chang: Institute for Entrepreneurial Studies and Innovation Management, Humboldt University of Berlin, 10099 Berlin, Germany
Bo Chen: Department of Economics, Southern Methodist University, Dallas, Texas 75275

Management Science, 2015, vol. 61, issue 6, 1237-1254

Abstract: In a procurement context, it can be quite costly for a buyer when the winning seller underestimates the cost of a project and then defaults on the project midway through completion. The average bid auction is one mechanism intended to help address this problem. This format involves awarding the contract to the bidder who has bid closest to the average of the bids submitted. We compare the performance of this mechanism with the standard low price mechanism to determine how successful the average bid format is in preventing bidder losses as well as its impact on the price paid by the buyer. We find the average bid mechanism to be more successful than expected because, surprisingly, bidding behavior remains similar between the average bid and low price auctions. We provide an explanation for the bidding behavior in the average bid auction that is based on subjects having problems processing signals near the extremes of the distribution. This paper was accepted by Teck-Hua Ho, behavioral economics .

Keywords: procurement auctions; average bid; bankruptcy; experiments (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1893 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:6:p:1237-1254

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().