Ruhr Economic Papers

Ruhr Economic Papers #254

Reputation and Mechanism Choice in Procurement Auctions – An Experiment

by Jeannette Brosig and Timo Heinrich

University of Duisburg-Essen, 04/2011, 35 S./p., 8 Euro, ISBN 978-3-86788-296-5

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Abstract

We experimentally study the role of reputation in procurement using two common mechanisms: price-based and buyer-determined auctions. While buyers are bound to buy from the lowest bidder in price-based auctions, they can choose between bidders in buyer-determined auctions. Only in the latter buyers can consider the reputation of bidders. We find that bidders supply higher quality in buyer-determined auctions leading to higher market efficiencies in these auctions. Accordingly, buyers prefer the buyer-determined auction over the price-based auction, while only half of the bidders do so. A more detailed analysis of buyers’ and bidders’ behavior and profits provides insights into their mechanism choice.

JEL-Classification: D44, C91, C72

Keywords: Buyer-determined and price-based procurement; reputation information; auction choice; experimental economics

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