An experimental investigation of auctions and bargaining in procurement

Jason Shachat and Lijia Tan ()
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Lijia Tan: The Wang Yanan Institute for Studies in Economics, Xiamen University

No 1203, Working Papers from Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory

Abstract: In reverse auctions, buyers often retain the right to bargain further concessions from the winner. The optimal form of such procurement is an English auction followed by an auctioneer’s option to engage in ultimatum bargaining with the winner. We study behavior and performance in this procurement format using a laboratory experiment. Sellers closely follow the equilibrium strategy of exiting the auction at their costs and then accepting strictly profitable offers. Buyers generally exercise their option to bargain according to their equilibrium strategy, but their take-it-or-leave-it offers vary positively with auction prices when they should be invariant. We explain this deviation by modeling buyers’ subjective posteriors regarding the winners’ costs as distortions, calculated using a formulation of probability weighting, of the Bayesian posteriors. We show alternative models based upon risk aversion and anticipated regret can’t explain these price dependencies.

Keywords: Auction; Bargaining; Experiment; Subjective Posterior (search for similar items in EconPapers)
JEL-codes: C34 C92 D03 D44 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-10-17, Revised 2012-10-17
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Related works:
Journal Article: An Experimental Investigation of Auctions and Bargaining in Procurement (2015)
Working Paper: An Experimental Investigation of Auctions and Bargaining in Procurement (2013)
Working Paper: An experimental investigation of auctions and bargaining in procurement (2012)
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