Cheap-talk Communication in Procurement Auctions: Theory and Experiment

Tinbergen Institute Discussion Paper 2020-013/VII

39 Pages Posted: 19 Mar 2020

See all articles by Sander Onderstal

Sander Onderstal

University of Amsterdam; Tinbergen Institute

Yang Yang

Sun Yat-Sen University (SYSU) - Lingnan (University) College

Date Written: February 19, 2020

Abstract

In procurement auctions, bidders are usually better informed about technical, financial, or legal aspects of the goods and services procured. Therefore, the buyer may include a dialogue in the procurement procedure which enables the suppliers to reveal information that will help the buyer to better specify the terms of the contract. This paper addresses the question of the value added of letting the sourcing process consist of both an auction and a negotiation stage, theoretically and in a laboratory experiment. Our theoretical results suggest that in a setting where the buyer and the suppliers have aligned interests regarding the terms of the contract, allowing the winning supplier to communicate with the buyer after the auction is beneficial to the buyer compared to no communication and ex-ante communication. In a setting where the buyer and the winning supplier have misaligned interests regarding the terms, the buyer benefits from ex-ante communication relative to no communication and ex-post communication. Our experimental data provide strong evidence for the predictions in the aligned-interest setting. In the misaligned-interest setting, we do not observe significant differences between the three mechanisms. Our experimental findings offer several managerial implications for the appropriate design of sourcing processes.

Keywords: Procurement Auctions, Bidding, Cheap-Talk Communication, Negotiations, Game Theory, Experimental Economics

JEL Classification: C92, D44, D82

Suggested Citation

Onderstal, Sander and Yang, Yang, Cheap-talk Communication in Procurement Auctions: Theory and Experiment (February 19, 2020). Tinbergen Institute Discussion Paper 2020-013/VII, Available at SSRN: https://ssrn.com/abstract=3542737 or http://dx.doi.org/10.2139/ssrn.3542737

Sander Onderstal (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Yang Yang

Sun Yat-Sen University (SYSU) - Lingnan (University) College ( email )

Guangzhou
China

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