An Experimental Investigation of Procurement Auctions with Asymmetric Sellers

Electronic reverse auctions are a commonly used procurement mechanism. Research to date has focused on suppliers who are ex ante symmetric in that their costs are drawn from a common distribution. However, in many cases, a seller's range of potential costs depends on their own operations, location, or economies of scale and scope. Thus, understanding how different bidder types impact auction outcomes is key when designing an auction. This study reports the results of the first controlled laboratory experiment designed to compare prices between first-price and second-price procurement auctions for homogeneous goods when seller cost types are asymmetric and the number of bidders varies. The results indicate that first-price auctions generate lower prices regardless of market composition. The results also reveal that first-price auctions are at least weakly more efficient than second-price auctions despite the theoretical prediction that the reverse should hold in asymmetric auctions. Post hoc analysis of individual bidders' behavior in first-price auctions revealed evidence that bidders systematically underbid when their cost realizations were close to the lower bound. Furthermore, bidders adjust their behavior based on the type of the other bidders in the market in a manner inconsistent with theory. Consequently, adding a third bidder to a two-bidder market is not advantageous to the buyer unless that third bidder is a low-cost type.