Auctions in defense acquisition: theory and experimental evidence - Research

Acquisition Review Quarterly, Summer, 2002 by Bruce G. Linster, David R. Mullin

More generally, with n suppliers the expected cost for the winning supplier is 1/n 1,

and the expected cost for the next lowest cost supplier is

[1-n-1/n] n/n 1 1/n 1 = 1/n 1 1/n 1 = 2/n 1,

which is exactly the same result we derived above. As before, the expected profit for the

winning supplier is 2/n 1 - 1/n 1 = 1/n 1.

Table 1

Description of Auction Types

Auction       Bidding/Offer    Description
Type          Process

English       bids increase    This is the typical auction in
                               which a single seller of a single
                               item (or lot of items) receives
                               increasing bids from prospective
                               buyers. The auction ends at a
                               predetermined time, and the item
                               goes to the highest bidder for the
                               highest bid price.

Reverse       offers decrease  The exact opposite of the English
                               auction. A single buyer of a single
                               item (or lot of items) receives
                               decreasing offers from prospective
                               sellers. The auction ends at a
                               predetermined time, and the item
                               is purchased from lowest offerer
                               for the lowest offer price.

Sealed-bid    Sealed bids      A single seller of a single item
                               (or lot of items) receives sealed
                               bids from potential buyers. Bids
                               are unknown to all other bidders.
                               The object goes to the high bidder
                               for the highest bid price.

Sealed-offer  Sealed offers    A single buyer of a single item
                               (or lot of items) receives sealed
                               offers from potential sellers.
                               Offers are unknown to all other
                               offerers. The object goes to the
                               high offerer for the lowest offer
                               price.

ENDNOTES

(1.) See, for example, McAfee & McMillan, 1987a.

(2.) See Davis & Holt, 1993, pp. 282-284.

(3.) Sec, for example, Davis & Holt, 1993, pp. 306.

REFERENCES

Battalio, R. C., Kogut, C. A., & Meyer, D. J. (1990). The effect of varying the number of bidders in first-price private value auctions: An application of a dual market bidding technique. In L. Green & J. H. Kagel (Eds.), Advances in behavioral economics, (Vol. 2, pp. 95-125). Norwood, NJ: Ablex Publishing.

Coppinger, V. M., Smith, V. L., & Titus, J. A. (1980). Incentive and behavior in English, Dutch, and sealed-bid auctions. Economic Inquiry, 43, 1-22.

Cox, J. C., Roberson, B., & Smith, V. L. (1982). Theory and behavior of single object auctions. In V. L. Smith (Ed.), Research in experimental economics (Vol 2, pp. 1-43). Greenwich, CT: JAI Press.