TY - JOUR
T1 - Split-award procurement auctions - Can bayesian equilibrium strategies predict human bidding behavior in multi-object auctions?
AU - Bichler, Martin
AU - Guler, Kemal
AU - Mayer, Stefan
N1 - Publisher Copyright:
© 2014 Production and Operations Management Society.
PY - 2015/6/1
Y1 - 2015/6/1
N2 - We analyze if and when symmetric Bayes Nash equilibrium predictions can explain human bidding behavior in multi-object auctions. We focus on two sealed-bid split-award auctions with ex ante split decisions as they can be regularly found in procurement practice. These auction formats are straightforward multi-object extensions of the first-price sealed-bid auction. We derive the risk-neutral symmetric Bayes Nash equilibrium strategies and find that, although the two auction mechanisms yield the same expected costs to the buyer, other aspects of the two models, including the equilibrium bidding strategies, differ significantly. The strategic considerations in these auction formats are more involved than in single-lot first-price sealed-bid auctions, and it is questionable whether expected utility maximization can explain human bidding behavior in such multi-object auctions. Therefore, we analyzed the predictive accuracy of our equilibrium strategies in the laboratory. In human subject experiments we found underbidding, which is in line with earlier experiments on single-lot first-price sealed-bid auctions. To control for regret, we organize experiments against computerized bidders, who play the equilibrium strategy. In computerized experiments where bid functions are only used in a single auction, we found significant underbidding on low-cost draws. In experiments where the bid function is reused in 100 auctions, we could also control effectively for risk aversion, and there is no significant difference of the average bidding behavior and the risk-neutral Bayes Nash equilibrium bid function. The results suggest that strategic complexity does not serve as an explanation for underbidding in split-award procurement auctions, but risk aversion does have a significant impact.
AB - We analyze if and when symmetric Bayes Nash equilibrium predictions can explain human bidding behavior in multi-object auctions. We focus on two sealed-bid split-award auctions with ex ante split decisions as they can be regularly found in procurement practice. These auction formats are straightforward multi-object extensions of the first-price sealed-bid auction. We derive the risk-neutral symmetric Bayes Nash equilibrium strategies and find that, although the two auction mechanisms yield the same expected costs to the buyer, other aspects of the two models, including the equilibrium bidding strategies, differ significantly. The strategic considerations in these auction formats are more involved than in single-lot first-price sealed-bid auctions, and it is questionable whether expected utility maximization can explain human bidding behavior in such multi-object auctions. Therefore, we analyzed the predictive accuracy of our equilibrium strategies in the laboratory. In human subject experiments we found underbidding, which is in line with earlier experiments on single-lot first-price sealed-bid auctions. To control for regret, we organize experiments against computerized bidders, who play the equilibrium strategy. In computerized experiments where bid functions are only used in a single auction, we found significant underbidding on low-cost draws. In experiments where the bid function is reused in 100 auctions, we could also control effectively for risk aversion, and there is no significant difference of the average bidding behavior and the risk-neutral Bayes Nash equilibrium bid function. The results suggest that strategic complexity does not serve as an explanation for underbidding in split-award procurement auctions, but risk aversion does have a significant impact.
KW - Bayes Nash equilibrium
KW - experiment
KW - multi-object auction
KW - procurement
KW - risk-aversion
UR - http://www.scopus.com/inward/record.url?scp=84931352571&partnerID=8YFLogxK
U2 - 10.1111/poms.12301
DO - 10.1111/poms.12301
M3 - Article
AN - SCOPUS:84931352571
SN - 1059-1478
VL - 24
SP - 1012
EP - 1027
JO - Production and Operations Management
JF - Production and Operations Management
IS - 6
ER -