Anthony M. Kwasnica

Better, Faster, Cheaper: An Experimental Analysis of a Multiattribute Reverse Auction Mechanism with Restricted Information Feedback

The majority of reverse auctions for procurement use a single-attribute (price) format while providing constraints on nonprice attributes such as quality and lead time. Alternatively, a buyer could choose to conduct a multiattribute auction where bidders can specify both a price and levels of nonprice attributes. While such an auction may provide higher theoretical utility to the buyer, it is not clear that this theoretical improvement will be realized given the increased complexity of the auction. In this research, we present an ascending auction mechanism for a buyer whose utility function is known and dependent on three attributes. Motivated by a supply chain procurement problem setting, we consider quality and lead time for the two attributes in addition to price. The auction mechanism provides the bidders with restricted feedback regarding the buyers utility function. We explore, experimentally, the performance of this multiattribute auction mechanism as compared to a price-only auction mechanism. Compared with the price-only auction, we find that our mechanism design is effective in increasing both buyer utility and bidder (supplier) profits.

A Laboratory Experiment to Compare Two Market Institutions for Emissions Trading

We report results from an economic experiment where two markets institutions for controlling water pollution are compared. In the status quo institution, permit trades between point and nonpoint sources are subject to a trading ratio. In the alternative, nonpoint abatements are converted into permits with multiple attributes. The test bed captures important features of existing markets for water quality trading. First, pollution is stochastic, poorly observed and imperfectly controlled by nonpoints. Second, the market is characterized by oligopsony. The results indicate that the multi-attribute market generates a superior environmental outcome to the trading ratio market. Furthermore, the average cost of pollution control is lower in the multi-attribute market. Market power is found to be independent of the type of market institution, but sellers of permits learn to resist market power as they gain experience. This is at the cost of market efficiency since their resistance reduces the number of trades.

Collusion and Equilibrium Selection in Auctions

We study bidder collusion and test the power of payoff dominance as an equilibrium selection principle in experimental multi-object ascending auctions. In these institutions low-price collusive equilibria exist along with competitive payoff-inferior equilibria. Achieving payoff-superior collusive outcomes requires complex strategies that, depending on the environment, may involve signalling, market splitting, and bid rotation. We provide the first systematic evidence of successful bidder collusion in such complex environments without communication. The results demonstrate that in repeated settings bidders are often able to coordinate on payoff-superior outcomes, with the choice of collusive strategies varying systematically with the environment. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

The choice of cooperative strategies in sealed bid auctions

Isaac and Walker (1985) demonstrated that stable cooperative agreements are often formed in sealed bid auctions. By extending the experimental environment to multiple, simultaneous sealed bid auctions, it is possible to not only examine whether bidders collude in experimental auctions, but also to determine the strategies they choose in order to implement their collusive agreements. Bidders have a variety of strategies, as opposed to the single auction, that they may select from. In the experiments reported, bidders often choose cooperative strategies that are consistent with truthful revelation of their values. However, bidders occasionally select strategies that ignore individual incentive compatibility. An analysis of the choice of strategies in different informational and distributional environments as well as of the auction outcomes provides some insights into these unusual choices. Keyword(s): Collusion, Auctions, Cooperation

Do Auctioneers Pick Optimal Reserve Prices

We investigate how auctioneers set reserve prices in auctions. A well-established theoretical result, assuming risk neutrality of the seller, is that the optimal reserve price should not depend on the number of participating bidders. In a set of controlled laboratory experiments, we find that seller behavior often deviates from the theoretical benchmarks. We extend the existing theory to explore three alternative explanations for our results: risk aversion, anticipated regret, and probability weighting. After fitting our data to each of these models through parameter estimation techniques on both an aggregate and individual level, we find that all three models are consistent with some of the characteristics of our data, but that the regret model provides a slightly more favorable fit overall. This paper was accepted by Teck-Hua Ho, decision analysis.

MULTIUNIT AUCTIONS: MULTIUNIT AUCTIONS

We survey experimental research on multiunit auctions with an emphasis on topics that may be of a unifying interest to experimental, as well as theoretical and empirical economists. Topics include static and dynamic multiunit auctions; combinatorial auctions and efficient auction design; simultaneous and sequential auctions; bidder asymmetry and endogenous entry, and collusion in auctions. We also discuss behavioral regularities observed in multiunit auction experiments.

Should Sellers Prefer Auctions? A Laboratory Comparison of Auctions and Sequential Mechanisms

When bidders incur a cost to learn their valuations, bidder entry can impact auction performance. Two common selling mechanisms in this environment are an English auction and a sequential bidding process. Theoretically, sellers should prefer the auction, because it generates higher expected revenues, whereas bidders should prefer the sequential mechanism, because it generates higher expected bidder profits. We compare the two mechanisms in a controlled laboratory environment, varying the entry cost, and find that, contrary to the theoretical predictions, average seller revenues tend to be higher under the sequential mechanism, whereas average bidder profits are approximately the same. We identify three systematic behavioral deviations from the theoretical model: (1) in the auction, bidders do not enter 100% of the time; (2) in the sequential mechanism, bidders do not set preemptive bids according to the predicted threshold strategy; and (3) subsequent bidders tend to overenter in response to preemptive bids by first bidders. We develop a model of noisy bidder-entry costs that is consistent with these behaviors, and we show that our model organizes the experimental data well.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1800. This paper was accepted by Teck Ho, behavioral economics.

Information Aggregation in Double Auctions: Rational Expectations and the Winner's Curse

This paper inquires about the ability of double auction institutions to aggregate information in the context of a “common value” information structure that is known to produce the winners curse in sealed bid environments. While many fundamental features of the economic trading mechanism are different from those studied in the context of sealed bids, the pattern of information distributed to the population of traders is the same. This gives us an opportunity to determine if the behaviors reported in sealed bid environments can be detected in the more active market environment. As such, the experiments are also a test of the robustness of earlier experiments that demonstrate that in economies with homogeneous preferences single compound securities organized by double auctions are able to aggregate information. The basic result is that a severe winners curse is not observed. The irrationality observed in sealed bids does not extend itself to the double auction environment. Information aggregation is observed and the rational expectations model receives support.

Introduction to the Special Issue on Experimental Economics in Practice

If you are familiar with the principles of laboratory experimentation and over the age of 30, chances are that you learned these principles from courses in the natural sciences or psychology. While the history of experimental economics stretches back into the mid dle of the last century (Roth 1995), it is in the last de cade that the discipline has come into its own. Econom ics laboratories at IBMs T.J. Watson Research Center, at Hewlett-Packard Laboratories, and at such academic institutions as Caltech, Harvard Business School, and Penn State (among many others) are the latest mani festations of the rise of experimental economics. This issue is devoted to introducing the Interfaces au dience to how experimental economics is being used in business practice today. Economics experiments en gage real people in markets and other economic activ ities for real cash stakes. The value experiments add to business and economics, much the same as to the nat ural sciences, comes down to one word: control. In ex periments, rules of interaction, the flow of information, and the reward system can all be controlled in ways that are rarely possible in the field. The influence of these factors on behavior and outcomes can be gauged through methodical, careful manipulation. And the ex perimenter is not limited to established institutions. With the same effort, one can set up and study the properties of institutions that do not?at least not yet? exist.

Did You See What I Saw? Interpreting Others' Forecasts When Their Information Is Unknown

We conduct a series of forecasting experiments to examine how people update their beliefs upon observing others’ forecasts. Subjects exhibit “cursedness,” that is, a propensity to underestimate the link between others’ forecasts and others’ information, which causes subjects to underreact. The behavior of sophisticated subjects is not affected by the framing of information, but unsophisticated subjects switch from underreaction to overreaction when they are only provided qualitative (rather than quantitative) forecast information. Our results have important implications for the way that financial analysts aggregate information and the way that financial institutions present forecasts to their clients.