An investigation of the average bid mechanism for procurement auctions

Wei Shiun Chang, Bo Chen, Timothy C. Salmon

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)

Abstract

In a procurement context, it can be quite costly for a buyer when the winning seller underestimates the cost of a project and then defaults on the project midway through completion. The average bid auction is one mechanism intended to help address this problem. This format involves awarding the contract to the bidder who has bid closest to the average of the bids submitted. We compare the performance of this mechanism with the standard low price mechanism to determine how successful the average bid format is in preventing bidder losses as well as its impact on the price paid by the buyer. We find the average bid mechanism to be more successful than expected because, surprisingly, bidding behavior remains similar between the average bid and low price auctions. We provide an explanation for the bidding behavior in the average bid auction that is based on subjects having problems processing signals near the extremes of the distribution.

Original languageEnglish
Pages (from-to)1237-1254
Number of pages18
JournalManagement Science
Volume61
Issue number6
DOIs
Publication statusPublished - 2015 Jun 1

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

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