Procuring Commodities: First-Price Sealed-Bid or English Auctions?

Shachat, J.; Wei, L.

Abstract

We use laboratory experiments to examine the relative performance of the English auction (EA) and the first-price sealed-bid auction (FPA) when procuring a commodity. The mean and variance of prices are lower in the FPA than in the EA. Bids and prices in the EA agree with game-theoretic predictions, but they do not agree in the FPA. To resolve these deviations found in the FPA, we introduce a mixture model with three bidding rules: constant absolute markup, constant percentage markup, and strategic best response. A dynamic specification in which bidders can switch strategies as they gain experience is estimated as a hidden Markov model. Initially, about three quarters of the subjects are strategic bidders, but over time, the number of strategic bidders falls to below 65%. There is a corresponding growth in those who use the constant absolute markup rule.

• Journal Article Type: Article
• Publication Date: 2012-03
• Deposit Date: Sep 17, 2014
• Journal: Marketing Science
• Print ISSN: 0732-2399
• Electronic ISSN: 1526-548X
• Publisher: Institute for Operations Research and Management Sciences
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 2
• Pages: 317-333
• DOI: https://doi.org/10.1287/mksc.1120.0704
• Public URL: https://durham-repository.worktribe.com/output/1445300