Bidding Strategies in Procurement Auctions with Information Asymmetries

This study explores the bidding strategies adopted by bidders in procurement auctions when the quality of information possessed by the bidders is asymmetric. In a laboratory experiment, two bidders compete against each other... [ view full abstract ]

This study explores the bidding strategies adopted by bidders in procurement auctions when the quality of information possessed by the bidders is asymmetric. In a laboratory experiment, two bidders compete against each other to procure a construction contract in which the low bidder wins. Both bidders are provided with estimates of the cost to complete the project. These cost estimates have been prepared by their own companies and therefore are different for each bidder. Bidders add in a profit margin before submitting their sealed bids. In this experiment, one bidder in each pair is “advantaged” and the other bidder is “disadvantaged.” The advantaged bidder has one or more of the following advantages:

1. data is provided on the accuracy of their own company’s past performance in similar auctions,
2. data is provided on the accuracy of the competitor’s past performance in similar auctions,
3. the cost estimate prepared by their own company is more precise than that of the competitor.

Our data is collected from college students participating in experimental sessions conducted in a university’s behavioral laboratory. The econometric software package Z tree is used to collect data for this interactive bidding experiment. There are 12 pairs of bidders in each of nine sessions (treatment scenarios), each lasting about 1.5 hours. Each session consists of 25 rounds of bids, with the first five being practice rounds. Students are randomly selected to be an “advantaged” or “disadvantaged” bidder. In each round, and for each pair of bidders, the true cost of a construction project (unknown to the bidders) is randomly selected from actual South Carolina Department of Transportation (SCDOT) projects. Each bidder is provided with their company’s estimated cost of completing the project. The lowest bidder wins the auction and completes the SCDOT project.

We hypothesize that the advantaged bidder will win more auctions, have higher profit margins, and will be less likely to suffer the “winner’s curse,” which arises when a competitor wins the auction but incurs a negative profit because the bid amount is less than the cost of completing the project. In addition, we investigate other hypotheses based on previous findings in the academic bidding literature.