- An Experimental Investigation of Auctions and
Bargaining in Procurement
- Jason Shachat, Lijia Tan
- Management Science pp. 1–16
- 2297 20160221 () Views:24549
- In reverse auctions, buyers often retain the right to bargain further concessions from the winners. The optimal
form of such procurement is an English auction followed by an auctioneer’s option to engage in ultimatum
bargaining with the winners. 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 of the Bayesian
posteriors, calculated using a formulation similar to a commonly used probability weighting function. We further
test the robustness of the experimental results and the subjective posterior explanation with three additional
experimental treatments.
- JEL-Codes:
- Keywords: auction; bargaining; experiment; subjective posterior
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