2020, Wooten

Decision Sciences © 2020 Decision Sciences Institute.
Volume 53 Number 3
June 2022
Overcoming Cost Disadvantages in

Procurement Auctions
Joel O. Wooten† , Sanghoon Cho† , Timothy D. Fry† ,
and Joan M. Donohue†
Moore School of Business, University of South Carolina, Columbia, SC, 29208,
e-mail: joel.wooten@moore.sc.edu, sanghoon.cho@grad.moore.sc.edu, timfry@moore.sc.edu,
donohue@moore.sc.edu
ABSTRACT
An increasingly studied auction format is the asymmetric procurement auction, which
features an advantaged bidder selling a good or service to a buyer. Such asymmetric
setups, although generally believed to be more realistic, are also more complex. We in-
vestigate one such setting where one bidder has a cost advantage. Our central question is
whether bidders who are cost disadvantaged can overcome their inferior cost position. In
a design that mirrors real construction procurement auctions, our laboratory experiment
tests whether two information asymmetries (more precise cost estimates and knowledge
about the cost estimating abilities of a competitor) allow cost-disadvantaged sellers to
better compete. We begin by testing bidder performance in a procurement auction where
the only asymmetry is due to a cost. In this setting, analytical benchmarks are known. We
find—consistent with other studies—that all bidder types submit aggressive bids well
below the Nash equilibrium predictions. Over time, subjects submit less aggressive bids,
moving closer to what theory would predict. We then extend our experiments to include
our novel, multiple asymmetry setup. We find that endowing cost-disadvantaged bidders
with higher cost estimate precision benefits the bidder, as one might expect. Notably,
providing market knowledge about a rival’s ability to estimate costs may not provide
a benefit; in fact, it seems bidders are not able to use this information effectively and
performance suffers. Finally, we show how bidders behave myopically when making
these decisions. These implications raise important questions about how asymmetries
interact in complex auction settings. [Submitted: August 9, 2019. Revised: August 5,
2020. Accepted: September 18, 2020.]
Subject Areas: Asymmetric Information, Cost, Experiment, and Procure-

ment Auction.
INTRODUCTION
In this paper, we study a particular type of sourcing or supply chain management
problem: first-price sealed-bid (FPSB) procurement auctions where one party has
a cost advantage. In procurement auctions, sellers compete to supply a product
or service to a buyer. Naturally, the ability to deliver at a reduced cost confers
† Corresponding authors.
486
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Wooten et al. 487
an advantage to that seller. Our central question revolves around whether that
advantage can be overcome by other bidders.
The majority of the literature—and the theoretical results that follow—makes
the strong assumption of seller symmetry, where all sellers are assumed to be
alike in terms of cost and information (Aloysius, Deck, Hao, & French, 2016).
In practice, however, the assumption of symmetric sellers may not be applicable
because sellers often differ in terms of their cost structure (Laffont, Ossard, &
Vuong, 1995), market experience (De Silva, Dunne, & Kosmopoulou, 2003), ca-
pacity availability (Jofre-Bonet & Pesendorfer, 2003), proximity to buyer (Flam-
bard & Perrigne, 2006), or access to information (Hendricks & Porter, 1988). In
sealed-bid settings, such asymmetries are the source of realized profits: Milgrom
and Weber (1982) suggest that a seller without private information can never earn
a positive payoff and Klemperer (1999) submits that any seller surplus is due to the
possession of private information, although incremental. Although prior research
has assumed an advantaged seller has a cost or information advantage, little or no
research has considered the case where one seller is simultaneously cost advan-
taged yet information disadvantaged competing against a seller who is simultane-
ously cost disadvantaged yet information advantaged.
Consider the scenario where a small, local construction company is bidding
against a large, national construction firm for a contracted project. In this case, the
national firm might benefit from lower costs due to economies of scale. It is also
reasonable to envision that the local company—due to its experience in the area,
reputation with subcontractors, and proximity to the project—might enjoy better
information than its national rival. The local company can invest time and resources
(e.g., visiting the project site, exploiting local knowledge, and working alongside
local subcontractors) in developing more accurate cost estimates. Further, given
that many online procurement auctions post all bids after awarding a contract, the
local company would have the ability to collect many data points about the na-
tional firm’s bid history. With some work, the local company could generate better
market knowledge (about the bidding patterns and cost estimating capabilities of
the national firm) than might be possible going the other direction (for the national
firm knowing the local company’s capabilities). In fact, this scenario played out on
our own campus when the business school took bids to design and construct a new
LEED platinum building and a number of smaller, local businesses lost opportuni-
ties to bigger, out-of-town contractors. A similar dynamic has been observed in the
construction industry for a variety of bidder types (e.g., domestic vs. international
and new vs. incumbent).
We assess the impact of better information—in the form of more precise
cost estimates and knowledge about the cost estimating abilities of a competitor—
when a seller is cost disadvantaged. Can such information advantages allow a cost-
disadvantaged seller to successfully compete against their cost-advantaged rival?
We answer this through a series of controlled lab experiments designed to examine
bidder behavior.
First, we test the predictions from a normative model to see if cost-
disadvantaged bidders behave as theory would predict. Next, we endow the cost-
disadvantaged bidder with better information—first as a cost precision advantage
and also as a competitor knowledge advantage—and analyze the impact of those
488 Overcoming Cost Disadvantages in Procurement Auctions
private endowments to a set of numerically simulated predictions. Finally, we an-

alyze bidder behavior and attempt to explain any departures from theory.
This setting is interesting for several reasons. Generally, the literature on auc-
tions focuses on the interconnectedness of valuations and builds models at the ex-
treme ends of that continuum. On one end is the private value (PV) model. Assume
that each bidder knows exactly, with no uncertainty, how much the item is valued
to herself but does not know how much any of the other bidders value the item.
Knowing another bidder’s valuation would not cause her to revise her own valu-
ation because differences in bidders’ evaluations of value are due to differences
in preference (Myerson, 1981). The PV model captures these assumptions. At the
other extreme, consider the situation where the value of the item is common to
all bidders but no bidder knows with certainty what that value might be. Instead,
each bidder receives a private estimate of this value. Any variation in the estimates
could be due to bidders having information that is different. In this case, know-
ing another’s valuation would add key information and help a bidder revise their
estimate. These are the assumptions of the common value (CV) model. A unique
feature of the CV auction is the possibility of the adverse selection problem known
as the winner’s curse. Because it is difficult for bidders to estimate the value of an
item, the bidder who wins the auction is often the bidder who most misestimates
this value. In this case, the bidder realizes less than expected profits, perhaps even
negative profits (Capen, Clapp, & Campbell, 1971).
In practice, most procurement auctions do not fit perfectly into the PV or CV
scenario. Consider the situation of the local company competing with the national
firm presented above. The national firm may enjoy a true cost advantage, which
fits nicely with the assumptions of the PV model where bidders have different
valuations. However, there are a number of uncertainties that affect all bidders the
same—such as the volume of concrete that will be required for a particular site
or the amount of time lost due to weather delays. Because bidders are making
estimates about uncertainties that will have a common, fixed value in the future,
this fits the assumptions of the CV model.
Recognizing that cost structures may be different between sellers but also
that sellers are seldom certain of their production costs, Rothkopf, Harstad, and Fu
(2003) combine the assumptions of the PV model with an assumption from the CV
model that explicitly recognizes that all sellers face uncertainties over their cost.
Their model assumes that a cost-advantaged seller has a lower cost to deliver the
item relative to another cost-disadvantaged seller, yet each seller is uncertain as to
what their exact cost might be. Instead, each seller is given a randomly generated
estimate of the cost. In their model, the level of cost uncertainty is identical for
both sellers and an equilibrium based on a multiplicative strategy solution is pro-
vided. Interestingly, Rothkopf et al. (2003) develop their model to assess whether
external subsidies are sufficient to overcome cost disadvantages. Here, we focus
on the advantages to be gained from superior information, using their model as
the baseline for examining estimate precision and market understanding that al-
ready exist in real-world situations (Wooten, Donohue, Fry, & Whitcomb, 2020).
Ours is the first paper to test the combined assumptions of the Rothkopf model
(and how bidders behave) in a laboratory experiment. In addition, our paper is
the first that considers two types of advantage that a bidder may enjoy—cost and
Wooten et al. 489
information—and how these two advantages work with or against each other in this
setting.
We find participants in the lab bid more aggressively than normative theory
and our numerical results would predict (a common finding). Bidders do move
closer to normative levels with experience, similar to some results where “super
experienced” bidders perform much better—but still below Nash equilibrium profit
levels—than their naïve selves (Kagel & Richard, 2001). Additionally, being cost
disadvantaged hurts one’s ability to make money, as expected. When assessing
whether more information helps cost-disadvantaged bidders overcome that hurdle,
we find that more precise cost estimates do help (because lower variability leads
to safer, more aggressive bids) but knowing about the cost estimating ability of
your competitor does not help. Having more complete market information results
in more aggressive bids, but in this case, they are not safer bids—knowing more
information about the market has not improved the distribution from which costs
are derived. Finally, we examine the behaviors surrounding these phenomena. We
find that the situation matters and bidders react myopically to the previous outcome
(in line with learning direction theory) and the prior opponent. Overall, we find
information and precision asymmetries to have an opposite effect than found in
prior literature. We reconcile this anomaly and conjecture that this is due to two
influences—the presence of two asymmetries concurrently (a novel setup) and the
negative impact of information transparency (an unrealistic artifact in some auction
research).
RESEARCH FOCUS AND THEORY

A growing number of questions about asymmetric auctions have gained attention
in the economics and behavioral operations literatures. This section reviews those
literatures, particularly as related to cost asymmetry in procurement auctions. Our
objective is to outline the relevant theory around three main questions that will
guide our experimental investigation: (1) How do sellers actually bid in cost asym-
metric procurement auctions? (2) Can cost-disadvantaged sellers better compete
with superior information (in the form of a precision advantage and also as a market
knowledge advantage)? (3) How does bidder behavior change when information
advantages are added to cost-disadvantaged procurement auctions?
Cost Asymmetry
There is a growing body of literature on PV and CV procurement auctions where
sellers are asymmetric. In the asymmetric PV literature, a seller is said to be
cost advantaged if they enjoy a lower cost of production—where the distribution
of their valuation signal stochastically dominates the valuation signals of other
sellers (Maskin & Riley, 2000). Our experiment looks like a shift asymmetry (e.g.,
Maskin & Riley, 2000; where both ends of a common support are adjusted by a
fixed about amount) instead of a stretch asymmetry (e.g., Güth, Ivanova-Stenzel,
& Wolfstetter, 2005; where only one end is adjusted). The typical assumption is
that valuations are drawn from a uniform distribution, which allows for many of
the theoretical results reported. This uniform assumption has been criticized as
being overly restrictive—suggesting that other, more realistic distributions need to

be considered (Dyer & Kagel, 1996; Aloysius et al., 2016). One contribution this
paper makes is to add insight to the asymmetric procurement auction literature
by using Weibull distributions as in Rothkopf et al. (2003) to more appropriately
model the valuation distributions.
Within the current literature on PV asymmetric procurement auctions, sev-
eral things are generally taken as true. First, results show that cost-advantaged
sellers will realize higher profits than cost-disadvantaged sellers—in analytical
(Maskin & Riley, 2000; Landsberger, Rubenstein, Wolfstetter, & Zamir, 2001),
empirical (Flambard & Perrigne, 2006; Estache & Iimi, 2010), and experimen-
tal (Saini & Suter, 2015; Aloysius et al., 2016) approaches. In addition, because
they start in inferior cost positions, cost-disadvantaged sellers generally resort to
very aggressive bidding, often submitting bids below their valuation in an effort
to win (Pezanis-Christou, 2002; De Silva et al., 2003; Güth et al., 2005; Flam-
bard & Perrigne, 2006; Estache & Iimi, 2010) or gain a foothold in the market (Li
& Philips, 2012). As a result of overly aggressive bidding, a cost-disadvantaged
seller may win an auction when they are not the lowest-cost seller, making the auc-
tion not efficient (McAfee & McMillan, 1989; Kirkegaard & Overgaard, 2008). In
response, cost-advantaged bidders also tend to submit aggressive bids, although
not as aggressive as the cost-disadvantaged bidders (Pezanis-Christou, 2002; Güth
et al., 2005). Rothkopf et al. (2003) explain that the cost-advantaged bidder uses
part of their advantage to bid more aggressively and keeps the rest of it as higher
profit.
Information Asymmetry
From the literature on asymmetric CV auctions, asymmetry is introduced when the
information available to one seller is superior to the information available to the
other. The result is that the advantaged seller, due to having superior information,
has less uncertainty in the value of the item resulting in a more accurate estimate.
Myerson (1981) refers to these differences in estimates as quality uncertainties.
Superior information may come in the form of a more precise estimate of the CV
(Hausch, 1987; Kagel & Levin, 1999; Laskowski & Slonin, 1999; Povel & Singh,
2006). When the information advantage is due to a better estimate of cost, as the
degree of advantage decreases between the two types of bidders, both types will
submit bids that are increasingly aggressive, with the information-advantaged
bidder submitting bids that are more aggressive than the bids submitted by the
information-disadvantaged bidder (Hausch, 1987; Grosskopf, Rentschler, &
Sarin, 2018). Another example of superior information is when an advantaged
seller possesses information that is not available to a disadvantaged seller (Gilley
& Karels, 1981; Milgrom & Weber, 1982; Englebrecht-Wiggans, Hendricks, &
Porter, 1988; Hendricks & Porter, 1988; Hendricks, Porter, & Wilson, 1994; Kagel
& Levin, 1999; Campbell & Levin, 2000; DeSilva et al., 2003; Banerjee, 2005;
Kim, 2008). A general result from this literature is that any bidder profits are due
to the amount of private information they possess, and a bidder with no private
information will make zero profits (Milgrom, 1989; Kagel & Levin, 1999). When
the superior information is due to the possession of private information, the seller
Wooten et al. 491
with inferior information will bid less aggressively if they knowingly compete
against a seller with superior information. In response, the seller with superior
information will bid less aggressively due to the conservative bidding strategy of
the seller with inferior information (Milgrom & Weber, 1982; Grosskopf et al.,
2018). In a study of drainage field auctions, Hendricks and Porter (1988) find
that information-advantaged bidders bid aggressively (closer to their estimated
values), often submitting bids below their expected value. DeSilva et al. (2003)
and Hendricks et al. (1994) find that information-disadvantaged sellers also tend
to submit aggressive bids and thus will realize lower profits when they do win. In
a lab experiment on multi-seller procurement auctions, Haruvy and Katok (2013)
similarly find that not having visibility into competitors’ bids or product quality
both increase sellers’ aggressive bidding and reduce profits.
Contrary to the results from the PV literature where the cost-disadvantaged
bidder resorts to aggressive bidding, in a CV auction, an information-advantaged
seller (who knows they are competing against an information-disadvantaged seller)
bids more aggressively than if the information were equal between the sellers
(Englebrecht-Wiggans et al., 1983; Hendricks & Porter, 1988; DeSilva et al.,
2003). In our study, we combine these two asymmetries. As such, we expect that
the bidder who is cost disadvantaged and information advantaged will submit much
more aggressive bids than their competitor. However, we do not know the impact
on profitability, because theory suggests the profitability moves in opposite direc-
tions for these effects. Our experimental design will allow us to test the impact of
these two asymmetries.
Buyer Cost
Finally, the behavior of the sellers in procurement auctions has implications on
the auction’s effectiveness. When the sellers are asymmetric due to a cost advan-
tage, buyer procurement costs tend to increase as the cost disadvantage increases
(Rothkopf et al., 2003). Thus, the ability of the buyer to extract surplus from the
auction is limited and the auction that minimizes buyer procurement costs is one
that discriminates in favor of the higher cost seller (Myerson, 1981; McAfee &
McMillan, 1987). In many auction settings, however, it may not be feasible for a
buyer to discriminate in favor of one type of seller over another. Research has also
shown that buyer procurement costs are impacted if the sellers are asymmetric due
to different information.
In a CV auction, reducing seller uncertainty over the CV will reduce buyer
procurement costs (Gilley & Karels, 1981; Milgrom & Weber, 1982; Hausch,
1987). In a PV auction, Rothkopf et al. (2003) also show that buyer procure-
ment costs decrease as uncertainty of seller PVs decreases. Kagel et al. (1987)
show that in a PV auction where one seller is better informed about their own
value compared to another seller, buyer procurement costs are higher than if all
sellers were equally informed. In addition, releasing information regarding a ri-
val’s value decreases procurement cost. In Laskowski and Slonin (1999) and Kagel
and Levin (2011), procurement costs increase if the quality of information for the
information-advantaged seller improved relative to the less informed seller such
that the level of asymmetry between the sellers increased.
Theoretical Predictions
Our asymmetric settings feature one bidder competing against a second, cost-
advantaged bidder in a FPSB procurement auction. To gain insight into how bidders
behave in such auctions, we start with a known theoretical result. Rothkopf et al.
(2003) assess whether external subsidies are sufficient to overcome cost disadvan-
tages in asymmetric procurement auctions. Instead of examining subsidies, we re-
purpose the base case scenarios to answer whether information can overcome cost
disadvantages. The model assumes that a cost-advantaged seller competes against
a cost-disadvantaged seller and that each seller is uncertain about their private cost.
We replicate their multiplicative strategy equilibrium for the two-seller case. Sell-
ers’ uncertainty over costs, u, is the standard deviation of cost estimation errors
that are randomly drawn from a two parameter Weibull distribution:

2 1 −1/2
u= 1+ − 2 1 + , (1)
m m
where m represents a common shape parameter.

To introduce cost differences, let Ca represent the cost for the advantaged
seller and Cd represent the cost for the disadvantaged seller. The ratio d = Cd / Ca
is then defined as the cost disadvantage. Let Pa and Pd represent the equilibrium
bidding strategies for the two sellers where:
mX (d) [1 + X (d)]1/m
Pa = (2)
[mX (d) − 1]
and
m[1 + 1/X (d)]1/m

Pd = , (3)
[m − X (d)]
where
1/2
{m (1 − d) + [m2 (1 − d)2 + 4d] }
X (d) = . (4)
2
After finding a closed form solution when one bidder is cost disadvantaged,
Rothkopf at al. (2003) predict equilibrium bidding strategies, expected profits,
expected procurement costs, optimal subsidies, and likelihood of inefficient out-
comes for a variety of shape parameters (m) and disadvantage ratios (d)—see their
Table 2 for full details. For example, for m = 10, d = 1.05, and u = 0.12, a bidder
with a 5% cost disadvantage should mark up their cost estimate (drawn from the
defined Weibull distribution) by 17.9% (vs. 21.1% for the advantaged bidder)—
yielding optimal expected profits of 3.9% (vs. 7.9% for the advantaged bidder).
The main insight from the base model mirrors prior results—a bidder with a cost
advantage uses part of the advantage to bid more aggressively and part to realize
more profit when they win (Rothkopf et al., 2003).
It would be nice to develop normative predictions that account for additional
asymmetries beyond cost (e.g., estimate precision and market understanding).
Wooten et al. 493
Figure 1: Numerical predictions: Overcoming cost disadvantage with precision.
However, layering in more heterogeneity makes it highly unlikely that a closed

form solution can be found.1 In lieu of normative predictions for our specific
information asymmetries, we find equilibrium bidding strategies (and profits)
by way of a numerical solution utilizing the grid search process suggested by
Seydel (2003). For a range of disadvantage ratios and estimate precisions, we
run simulations using markup increments of 0.5% over 1,000,000 trials and then
average five instances of each simulation to help smooth out any discontinuities.
We validate our approach by successfully matching the normative predictions
for several known benchmarks from the normative model. Looking at all of the
simulations, we observe the effect of more precise cost estimates for the disad-
vantaged bidder. We present a subset of the results in graphical form in Figure 1
to illustrate our first key point—bidders with a cost disadvantage can overcome
their inferior position by improving estimate precision (for sufficiently low levels
of d).
As expected, bidders who are identical but cost disadvantaged should do
worse (more aggressive markups and less profit) than their cost-advantaged coun-
terparts (Figure 1). This corresponds to the leftmost scenario in each panel, where
the precision of the disadvantaged bidder (10% CV) equals that of the advantaged
bidder. In the left panel, where the cost difference between the bidders is 10%,
the disadvantaged bidder never makes higher profit than the advantaged, no mat-
ter their estimate precision. However, as the cost disadvantage shrinks (as in the
right panel), improved cost estimate precision along the x-axis allows the disad-
vantaged bidder to make more profit than the advantaged bidder. In the case of
d = 1.05, the crossing point—where the profit margin is equal between the two
bidders—occurs when the cost-disadvantaged bidder enjoys an estimate precision
of 3% CV (yielding 4.4% profit for each). It is notable that improved precision
1 Discussions with one of the authors of the original model (Rothkopf et al., 2003) revealed that they had
worked on closed form solutions that included more asymmetries but were unable to develop a solution.
In fact, they recommend a numerical solution even for simpler deviations such as increasing the number of
sellers beyond two.
permits the high-cost bidder to mark up their estimate more aggressively, but their
profit remains surprisingly flat—this simply punishes the cost-advantaged bidder
and transfers the surplus to the auction buyer. Although increased precision may
not improve the profitability of disadvantaged bidders all that much, it should level
the playing field between the two sellers in that both can expect equal profits when
bidding.
We take our full set of equilibrium strategies (based on the theoretical model
and our numerical predictions) and move to the lab in order to generate experimen-
tal results in similar scenarios. In this way, we address our basic research questions
and benchmark our results against equilibrium predictions.
EXPERIMENTAL DESIGN
We conduct a series of experiments to explore our three questions about cost asym-
metric procurement auctions: (1) Do sellers bid as theory would predict? (2) Can
cost-disadvantaged sellers better compete through superior information? (3) How
does bidder behavior change under information asymmetries? In our experiments,
each of two bidders competes as a road construction contractor attempting to win
contracts in a series of 25 first-price sealed-bid auctions. We randomly match bid-
ders each round from each of a session’s two treatment groups. Bidders remain in
the same treatment group (and bid against the opposite group) for the entire ses-
sion. The treatments consider three factors—cost advantage, estimate precision,
and understanding (of competitor estimating ability)—and are built to mirror the
setup from the multiplicative strategy model and simulations in THEORETICAL
PREDICTIONS section.
Experimental Setup and Protocol

All experiments were conducted at a large U.S. business school using third-year
undergraduate business majors who had taken an introductory operations manage-
ment course. For each experimental session, each student was randomly assigned
to one of the two seller types: (1) cost advantaged or (2) cost disadvantaged. Each
participant was informed of their seller type and remained in that type for the entire
session. In addition to the level of cost asymmetry, treatment groups specified each
participant’s bidding precision and market knowledge (to manipulate the informa-
tion asymmetries). In their separate groups, subjects read written instructions. A
set of summary instructions were also read to each group and questions were an-
swered. Participants were then seated at computer terminals and required to enter
some identifying information. At the beginning of each session, participants com-
pleted five trial rounds before starting the 20 auction rounds.
Each round consisted of the following steps. The actual cost to complete a
project for the cost-advantaged seller, Ca , was randomly drawn from a uniform dis-
tribution on the interval [$100,000, $400,000]. The distribution to generate actual
costs is not relevant to our results as the impact to bidders is based on how well that
cost can be estimated, not on how the actual cost is generated. Despite that, this
range of project costs was selected as it is representative of one of the most com-
mon classes of projects posted by a state Department of Transportation (DOT) in a
Wooten et al. 495
set of 3,960 projects from 2003 to 2015 and is fairly uniform.2 After drawing Ca ,
the cost for the cost-disadvantaged seller was determined by multiplying Ca by the
chosen cost disadvantage ratio d. Subjects submitted bids without knowing Ca or
Cd . Instead, each participant received a private signal, ca or cd , which represented
their estimated cost to complete the project. After receiving the estimate, each par-
ticipant submitted a bid. The winner was determined using the FPSB format (low
bid wins) and the results were revealed. Winning bidders observed both submitted
bids, their actual project cost, their profit (or loss), and the change to their operating
cash balance. Losing bidders observed both submitted bids and their (unchanged)
cash balance. The actual cost to complete the project and the associated profit were
known only by the winning bidder and were not common knowledge. See Online
Appendices A and B for example screen samples and instructions.
All experiments were run using the z-Tree software platform (Fischbacher,
2007). Each session lasted 75 minutes on average and contained an even number
of participants who were randomly split into the two seller types. In total, 220
participants went through the experiment. Each bidder’s opponent was randomly
assigned from the other seller type for each of the 25 rounds. Thus, participants
did not face the same competitor every round (and knew this), which prevented
the development of any idiosyncratic patterns between sellers. All sellers were
provided with a calculator within the platform and scratch paper to perform any
calculations necessary. The experiment rounds proceeded in lockstep and results
were provided only after all participants had submitted bids.
All participants were paid $10 for participating, with additional prizes of $10,
$20, and $30 awarded to the top three performers in each of a session’s two groups.
As an added enticement, all participants were allowed to complete the experiment
in lieu of one of their class’s online assignments. No subject participated in more
than one session. Prior to the actual experiment, we ran a pilot test with several
graduate students to insure our experiment protocol worked as planned.
Treatments
In total, we run 10 different treatment combinations (Table 1) to investigate the
impact of cost and information advantages in procurement auctions. We con-
struct the treatments in tiers to address increasingly complex questions. First,
we test the predictions from the normative model (Rothkopf et al., 2003) to see
if cost-disadvantaged bidders behave as predicted. Next, we endow those cost-
disadvantaged bidders with better information in the form of a more precise cost
estimate and test our numerical results. Finally, we endow the cost-disadvantaged
bidders with a second information advantage in the form of better market under-
standing by restricting the market understanding of the cost-advantaged bidder.
Our three treatment factors are represented by the cost disadvantage ratio (d), cost
estimate precision as a coefficient of variation (CV), and market understanding of
the cost estimate precisions (CV info). Details on each of the treatment factors are
discussed below.
2 This mirrors the project cost methodology of Wooten et al. (2020) and—as suggested by Rothkopf et al.
(2003)—the bidding strategy should be independent of the magnitude of the project cost.
Table 1: Experimental design.

Cost
Disadvantaged Cost Advantaged
Seller Seller
Scenario Subjects d CV (%) CV Info CV (%) CV Info Asymmetry
1 18 1.05 12 Both 12 Both Cost

2 20 1.05 10 Both 10 Both
3 22 1.05 5 Both 10 Both Cost, Precision
4 20 1.05 0 Both 10 Both
5 22 1.05 10 Both 10 Own
6 24 1.05 5 Both 10 Own
7 22 1.05 0 Both 10 Own
Cost, Precision, Info
8 24 1.1 10 Both 10 Own
9 24 1.1 5 Both 10 Own
10 24 1.1 0 Both 10 Own
Cost Disadvantage
Cost disadvantage (d) represents the difference in the cost of production between
the high- and low-cost seller. We mirror Rothkopf et al. (2003) exactly, with the
disadvantage given as a ratio. The values depicted in the original normative model
include d = 1.05, 1.1, 1.5, and 2.0—corresponding to cost disadvantages of 5%,
10%, 50%, and 100%. We use two of these (1.05 and 1.1) in our experiments and
exclude the others. Not only are the two highest values generally unrealistic, but
there is little chance a seller saddled with such high costs could compete. In our nu-
merical simulation, even a cost disadvantage of 10% proved too large to overcome
with just improved precision. Predictions from the normative model also bear this
out (Rothkopf et al., 2003), so we test only the two smaller levels.
Cost Estimate Precision

To determine whether better information can help overcome a cost disadvantage,
we first look at improved cost estimates. Each seller’s cost estimate is randomly
drawn from a distribution centered on their actual cost (Ca or Cd ). To reflect a
better ability to estimate costs, we vary the coefficient of variation (CV) of the cost
estimation distribution. The cost estimate for the cost-disadvantaged seller is at
least as precise (CVa ≥ CVd ) as the estimate for the cost-advantaged seller. So that
we can vary the CV between sellers to reflect different levels of precision, each
cost estimate is drawn from a three-parameter Weibull distribution3 with location
parameter γ , scale parameter β > 0, shape parameter α > 0, and x > γ :

α−1 x−γ α
f (x) = aβ (−α)
(x − γ ) exp − , (5)
β
3 Two-parameter Weibull distributions have been used to represent precision (Rothkopf, 1969). In such cases,
the location parameter (γ ) is set to 0, which results in a mean cost of Ca = 1 for the advantaged bidder (and
Cd > 1 for the disadvantaged). The complication is that the cost estimation distribution for each seller type
has a common CV. Here, we require different levels of precision, so a three-parameter Weibull is required.
Wooten et al. 497
Figure 2: Forecast error by Fortune 100 firm in procurement auctions.
with mean and variance:

β 1
μ=γ + ,
α α
2
β 2
2 1 1
σ2 = 2 − . (6)
α α α α
In our experiments, we begin with shape parameters of α = 10 and 3.6 (and
CV = 12% and 10%) to mirror the setup in table 2 of Rothkopf et al. (2003) and our
numerical simulations. This allows us to compare behavioral results from the lab
with equilibrium predictions. To test the impact of estimate precision, we then set
the CVa equal to 10% and vary CVd from 10% to 5% to 0% (a CV of 0% represents
perfect knowledge of costs) for all remaining trials. A Weibull shape parameter of
α = 3.6 reflects cost estimation errors that follow a bell-shaped distribution. Avoid-
ing uniform cost estimate distributions in favor of more realistic distributions is
another way that our experiment adds insight to the asymmetric procurement auc-
tion literature. In addition to calls for such realism (Dyer & Kagel, 1996; Aloysius
et al., 2016), there has been at least one recent experiment that has used a bell-
shaped estimate distribution (Wooten et al., 2020). We follow this roadmap and
also provide evidence that such a distribution is appropriate. Analyzing 905 on-
line procurement auctions from a Fortune 100 company (for which we have cost
estimates, bids, and actual costs for sourcing projects won in an internal division
from 2014 to 2016), we see that actual cost estimation errors follow a bell shape
(Figure 2).
Market Understanding (of Competitor)

Normally, even if cost asymmetries are present, sellers are assumed to possess
identical, transparent information (Aloysius et al., 2016). In fact, the normative
Table 2: Example markups from a participant for outlier identification.

Round Markup
1 35.8% 6 30.7% 11 3.1% 16 97.0%*

2 18.1% 7 10.3% 12 12.7% 17 9.9%
3 2.7% 8 7.2% 13 2.0% 18 14.0%
4 7.5% 9 13.6% 14 10.1% 19 10.9%
5 7.8% 10 2.8% 15 6.2% 20 11.1%
Median 10.2%
model we benchmark against includes full visibility by the sellers into the auction
conditions. Our second information lever to overcome a cost disadvantage comes
in the form of better market understanding. Market understanding is defined by
which cost estimate precisions are known—either own (the seller knows the CV
of their own estimate but not their competitor’s CV) or both (the seller knows
both CVs). Because our benchmark starts with full market understanding for each
seller, we reduce the market understanding of the cost-advantaged seller in some
scenarios in order to give the cost-disadvantaged seller help. We then examine the
effect of this benefit. All of our scenarios are shown above in Table 1.
ANALYSIS AND RESULTS

At the conclusion of the lab sessions, we examined the bidding data and observed
excellent understanding of the instructions and reasonable bidding overall. How-
ever, there were a few cases that were unusual. Out of 220 participants, we flagged
three bidders that did not understand the exercise well. These individuals repeat-
edly lost money with negative markups and then (irrationally) decreased their next
markup even more. Each of them ended up sustaining huge auction losses thanks
to consistently negative markups (average: –4.2%). Out of 5,500 bids in total, we
also flagged 36 individual bids that appeared to be typos or errors of some kind.
For example, one participant placed a bid in round 10 that was 408% above their
estimated cost; another placed a bid in round 9 that was 84% below their estimated
cost. These anomalies were rare and inconsistent with those bidder’s overall bid-
ding patterns. For example, Table 2 shows each bid (as % markup) for a particular
participant A. In round 16, bidder A’s markup of 97% is clearly inconsistent with
both neighboring bids and their typical bid. A plausible explanation is that a typo
occurred during the entry of their bid ($198,888)—and that a bid of $108,888 (a
markup of 7.8%) was actually intended. Across all the scenarios, we flagged nine
negative markups (average: –53.2%) and 27 positive markups (average: 78.5%)
that deviated substantially from prior bids. These represent all the bids where the
markup was greater than 50% or less than –20% of the cost estimate. We removed
the auctions that contained the irrational bidders and these outlier bids—as well as
their paired partners—for all analyses unless otherwise stated.4
4 Even though we remove a handful of irrational bidders and outlier bids to increase validity of the dataset,
the results are robust to leaving them in—we obtain nearly identical results without any exclusions.
Wooten et al. 499
Cost-disadvantaged Bidders
Our first research question seeks to confirm theoretical predictions for FPSB pro-
curement auctions featuring two bidders with different cost structures. Will bidders
behave as theory would expect, with cost-advantaged sellers earning more profit
thanks to higher markup percentages than their disadvantaged rivals? We begin by
presenting the summarized results from the experiments and overall mean com-
parisons to show how markups differ for our bidders.
Table 3 shows % Markup and % Profit for each scenario. Also included are
the normative model and numerical simulation predictions for four sets of parame-
ters where the only asymmetries present are cost and precision. These predictions
are placed directly above the experiment scenario to which they correspond (sce-
narios 1–4). We did not calculate a numerical solution for the treatments focusing
on the impact of market understanding, as such scenarios would require a different
model and assumptions.
The immediate takeaway from our four benchmark scenarios is that lab par-
ticipants bid significantly less (as indicated by percent markup) than theory would
predict.5 This is not unexpected in the lab setting.
Despite the lower magnitudes, the spread between the markups and relative
comparisons across treatments are directionally correct and related to theoreti-
cal predictions, with disadvantaged bidders that seem more aggressive with their
markups than the advantaged bidders. The difference in bidders (e.g., 8.2% vs.
12.0%) is not statistically significant when evaluated with a Wilcoxon rank sum
test. However, there are more factors that need to be accounted for. We know that
every round is not conducted in isolation. Participants bid in 20 consecutive rounds
(after the training rounds), so learning and behavioral effects may exist.
Figure 3 shows the average markup by round for our benchmark scenarios.
First, it is easy to again see how bidders in the lab are more aggressive than theory
would predict, with actual markups (dashed lines) below the solid lines. Second,
bidders appear to become less aggressive over time, with markup percentages that
move closer to the normative benchmarks as rounds progress. One way to track
that move is by fitting a linear trendline to the markup averages by round. Those
slopes are as follows:
Scenario Seller d Seller a Average
1 0.23 0.22 0.23

2 0.33 0.07 0.20
3 0.12 0.01 0.07
4 0.17 0.43 0.30
1–10 0.17 0.18 0.18
On average, bidders become less aggressive with their markups over time.
This resembles a main result from an analysis of Utah construction procurement
5As outlined in Aloysius et al. (2016), direct comparisons between measures that do not depend on ex
post cost realizations are straightforward. Because markups do not depend on actual cost, we start with
comparison t-tests.
Table 3: Summary of the observed experiment outcomes (and theoretical predictions).
500
Cost
Cost Cost Cost

Scenario d CV % Info CV % Info Disadvantaged Advantaged Disadvantaged Cost Advantaged
Theory 1 1.05 12 Both 12 Both 17.9 21.1 ***

3.9 7.9 ***
1 1.05 12 Both 12 Both 8.2 12.0 1.1** 2.7
Theory 2 1.05 10 Both 10 Both 17.8 20.9 ***
4.5 8.4 ***
2 1.05 10 Both 10 Both 8.4 10.2 0.7 1.8
Theory 3 1.05 5 Both 10 Both 13.0 15.4 ***
4.4 5.1 ***
3 1.05 5 Both 10 Both 4.5*** 8.5 0.9 –0.1
Theory 4 1.05 0 Both 10 Both 11.3 13.4 ***
4.4 3.8 ***
4 1.05 0 Both 10 Both 6.0* 9.1 1.8 0.7
5 1.05 10 Both 10 Own 8.1* 12.9 0.7 2.6
6 1.05 5 Both 10 Own 8.1* 12.4 1.8 2.4
7 1.05 0 Both 10 Own 5.5*** 11.6 1.8** 1.0
8 1.1 10 Both 10 Own 8.1** 12.6 –1.0*** 5.1
9 1.1 5 Both 10 Own 7.7*** 14.3 1.9*** 4.0
10 1.1 0 Both 10 Own 6.1*** 13.9 2.0 2.8
Note: Wilcoxon rank sum test shown comparing participant-level averages between seller types (D vs. A).
Brackets show t-test significance for averages versus the theoretical predictions (for D and A).
Theory 1 predictions from normative model (and simulation); Theory 2–4 from numerical simulation.
Significance levels:
∗
<.10,
∗∗
<.05, and
∗∗∗
<.01.
Overcoming Cost Disadvantages in Procurement Auctions
Wooten et al. 501
Figure 3: Average markup by round: Cost and precision asymmetries (theoretical

vs. observed).
auctions in which bidders with more experience bid less aggressively and with less
dispersion than inexperienced bidders (Li & Philips, 2012). From here on out, we
will control for Bid Round to capture this learning effect with experience. We will
also include Cash Balance as another situational control to account for how much
money a participant has won or lost at any point in time, in order to account for
both skill level and the one part of the experimental condition that changes round-
to-round.
In conclusion, comparing the lab results with the normative model predic-
tions highlights that bidders in the lab are more aggressive with their bids (Table 3
and Figure 3). We also observe that bidders learn over time, with average markups
that move closer to predicted values with experience (Figure 3). These results raise
several questions: What behaviors lead to these outcomes and what are the effect
of these markups on profit? These questions are answered in our next two sections.
Overcoming Cost Disadvantage (with Precision and Market

Understanding)
Our central question is whether better information allows disadvantaged bidders to
better compete. To answer this, we estimate a series of repeated measures mixed
models (fit via a restricted maximum likelihood method) with random effects for
Table 4: Analysis of performance outcomes (profit).

4–1 4–2 4–3
Dependent variable % Profit % Profit % Profit

Explanatory variables Cost Treatments Treatments
Constant –1.28 (0.86) –0.22 (0.88) 2.03 (1.05)*

Treatments
Cost disadvantage (5%) –0.95 (0.30)*** –0.48 (0.47) –3.31 (0.68)***
Cost disadvantage (10%) –1.20 (0.38)*** –0.72 (0.51) –3.71 (0.79)***
High precision (5% CV) 1.25 (0.44)*** 1.26 (0.41)***
Perfect precision (0% CV) 1.52 (0.44)*** 1.54 (0.41)***
Market understanding –2.03 (0.39)*** –1.11 (0.41)***
Opponent treatments
Opp. w cost disadv. (5%) –1.86 (0.40)***
Opp. w cost disadv. (10%) n/a
Opp. w high precision (5%) –0.90 (0.41)**
Opp. w perfect precision (0%) –1.49 (0.41)***
Opp. w market understanding –0.33 (0.41)
Control variables
Bid round 0.07 (0.02)*** 0.08 (0.02)*** 0.08 (0.02)***
Cash balance ($100K) 0.53 (0.16)*** 0.44 (0.16)*** 0.40 (0.16)***
Bidder random effects yes yes yes
Wald Chi-squared 54.3 105.0 157.3
Mean response 1.8 1.8 1.8
Observations 3,892 3,892 3,892
DF 5 8 12
Note: Repeated measures mixed models with random effects via restricted maximum likeli-
hood method. Shown for scenarios 2–10. Standard deviations in parentheses. No coefficient
for opp. w 10% cost disadvantage due to limited scenarios; variable absorbed by precision.
∗
<.10,
∗∗
<.05, and
∗∗∗
<.01.
between- and within-subject variances that relate % Profit for each individual bid
to our experimental conditions. If information advantages help cost-disadvantaged
bidders earn more profit, we should see positive coefficients on Precision and Mar-
ket Understanding. Only precision improvements turn out to be positive. Results
are presented in Table 4.
We start by estimating a baseline model (4–1) with just the cost asymme-
try and control variables. Across all sessions, we observe that the profit (per bid)
decreases with a cost disadvantage (of either 5% or 10%)—as expected—and in-
creases with both the Bid Round and Cash Balance.
Next, we include our treatment effects for precision and market under-
standing (4–2) as the simplest measure of whether additional information helps
cost disadvantaged bidders. The reference category (intercept) is defined to be a
cost-advantaged bidder with low precision (10% CV) and no market understand-
ing. The coefficients on High Precision (1.25, p = .004) and Perfect Precision
Wooten et al. 503
(1.52, p = .001) are positive and significant, whereas the one on Market Under-
standing (–2.03, p = .000) is negative and significant. This suggests that having
better estimating ability leads to higher profits but that knowing your competitor’s
estimating precision (in addition to your own) is detrimental. The coefficients on
cost in this simple model are not significant. However, as dyadic experiments, the
bidding situation matters: to control for an opponent’s knowledge, we add addi-
tional treatment controls and check the robustness of our results.
When controlling for both bidders’ treatments (4–3), a consistent result
emerges. We again observe that being at a cost disadvantage is bad for profit
(–3.31, p = .000; –3.71, p = .000), that having better cost estimating ability in-
creases profit (1.26, p = .002; 1.54, p = .000), and that knowing your competi-
tion’s estimating precision lowers profit (–1.11, p = .007). The magnitude of the
coefficients gives the direct impact on profit margin, so improving cost estimating
precision does not at first appear to be enough to overcome either level of cost
disadvantage. However, the bidding situation must be accounted for. Doing that,
improved precision can lead to higher profits.6 That supports our theoretical find-
ings (Figure 1), where a CV smaller than 3% resulted in higher expected profits
for the disadvantaged bidder, and our average observed profit outcomes (Table 3).
Also, it seems counterintuitive that possessing more information about a compet-
ing bidder would reduce performance, but that result is similar to recent findings in
CV procurement auctions (Wooten at al., 2020). Thus, although more precise cost
estimates may help offset a cost disadvantage, knowledge about the cost estimating
abilities of a competitor may not. From a practical standpoint, a cost-disadvantaged
firm can become more competitive by improving their cost estimation process rel-
ative to their competitors. Time spent learning competitor estimation abilities may
not be worth the effort.
Bidder Behavior
We demonstrated that profit (our ultimate outcome) is impacted by our treatments
in the prior section. Here, we look at how bidder decisions (in the form of markups)
are affected. First, we examine how individuals modify their strategies depending
on their bidding situation. Second, we examine departures from expected bidding
strategies and attempt to explain why bidders might be deviating from theoretical
predictions.
Wooten et al. (2020) highlight that a bidder’s previous auction result in-
fluences their next bid. We test for the same effect in our procurement auction,
and see similar reactions (Figure 4). Bidders who profit in the previous round in-
crease their next bid, bidders who lose money in the previous round (winner’s
curse) increase their next bid even more, and those who do not win in the previous
round are generally more aggressive, marking up their estimate less in the next
round.
6As an example, if a cost-advantaged bidder (10% CV, own info) were bidding against a 5% cost-
disadvantaged bidder with perfect precision (0% CV, own info), then the coefficient impacts to profit margin
would be –3.35 (or –1.86 – 1.49) for the cost-advantaged bidder and -1.77 (or –3.31 + 1.54) for the cost-
disadvantaged bidder.
Figure 4: Impact of prior outcome on next markup—with estimation precision.
These myopic adjustments are predicted by learning direction theory based

on what might have worked better in the previous round (Selten, Abbink, & Cox,
2005). There also appears to be some impact of estimation precision (CV, as seen
in Figure 4). We turn to regression analysis (Table 5) to test for differences among
our treatments and bidding situations.
We add two additional controls to account for the result of the previous
auction (to capture the three situations from Figure 4) and use a repeated mea-
sures mixed model (as before). Our baseline model (5–1, focused only on cost
disadvantage) highlights two main points—first, regardless of whether the cost
disadvantage is 5% or 10%, bidders with an inferior cost position are equally as
aggressive bidding; and second, our control variables match expectations (with
bidders adjusting myopically to their last result, consistent with Figure 4). Adding
the full set of treatment conditions (5–2), we observe similar results. We also
get insight into the behaviors driving our profit results. The improved profit in
treatments with higher precision (in the previous section) could have simply been
an artifact of having better estimates and suffering less winner’s curse (with the
same markup strategy). However, that is not what we see when we look at how
participants bid. More precise cost estimates lead bidders to submit more ag-
gressive bids (as predicted by Figure 1), as reduced uncertainty means less need
for buffers to make profit. This result is similar to that found in the papers by
Englebrecht-Wiggans et al. (1983) and Milgrom and Weber (1983) in CV auctions.
The effect of this is clear in the perfect precision case (0% CV): the coefficient
(–3.60, p = .036) indicates the average markup is more aggressive/negative;
Wooten et al. 505
Table 5: Analysis of bidder behavior (markup).

5–1 5–2
Dependent variable % Markup % Markup

Explanatory variables Cost Treatments
Constant 13.80 (1.15)*** 20.03 (2.55)***

Treatments
Cost disadvantage (5%) –4.94 (0.79)*** –4.45 (1.84)**
Cost disadvantage (10%) –4.92 (1.01)*** –4.84 (2.21)**
Low precision (10% CV) –2.25 (1.49)
High precision (5% CV) –2.92 (1.71)*
Perfect precision (0% CV) –3.60 (1.72)**
Market understanding –3.20 (1.24)***
Opponent treatments
Opp. w cost disadv. (5%) –1.67 (1.22)
Opp. w cost disadv. (10%) n/a
Opp. w low precision (10%) n/a
Opp. w high precision (5%) –0.39 (1.22)
Opp. w perfect precision (0%) –0.74 (1.23)
Opp. w market understanding –1.35 (1.23)
Control variables
Won previous (profit) 1.09 (0.21)*** 1.08 (0.21)***
Won previous (loss) 2.21 (0.28)*** 2.20 (0.28)***
Bid round 0.22 (0.02)*** 0.22 (0.02)***
Cash balance ($100K) –0.93 (0.20)*** –0.97 (0.20)***
Bidder random effects Yes Yes
Wald Chi-squared 260.0 280.2
Mean Response 9.5 9.5
Observations 3,996 3,996
DF 7 15
Note: Repeated measures mixed models with random effects via restricted maximum like-
lihood method. Shown for scenarios 1–10. Standard deviations in parentheses.
∗
<.10,
∗∗
<.05, and
∗∗∗
<.01.
however, virtually none of the bids are less than the estimated cost (Table 6),
because bidders recognize negative markups hurt profit in this case. Those two
adjustments lead to a contraction of the markup range as precision increases and
fewer instances of winner’s curse.
Market understanding (–3.20, p = .010) also makes bidders more aggressive
with their markups. In a CV lab setting, Wooten et al. (2020) show that know-
ing competitor information can lead to information overload and more aggres-
sive bids. This appears to be a similar to our PV auctions with uncertainty. In
effect, when cost-advantaged sellers know about the bidding precision of their
cost-disadvantaged rivals, they reduce their markup—and reduce their profits in
lockstep. Those bidders are better off not knowing about the cost estimating capa-
bilities of their opponents.
Table 6: Frequency of negative profit and negative markup.

Cost Disadvantaged Cost Advantaged
Winner’s Negative Winner’s Negative

CV % Curse % Markup % Curse % Markup %
0 0.8 0.9 – –
5 13.6 6.9 – –
10 20.5 9.8 18.2 3.6
Table 7: Analysis of bidder response to Nash bidding (scenarios 1–4).

7–1 7–2 7–3
Dependent variable % Markup % Markup % Markup

Prior Prior Prior
Explanatory variables Nash Opp Opp Markup Opp Bid %
Constant 13.45 (2.78)*** 13.10 (2.78)*** 13.26 (2.77)***

Treatments
Prior partner bid 1.14 (0.55) ** 0.04 (0.01)*** 0.06 (0.02)***
Cost disadvantage (5%) –3.74 (1.31)*** –3.38 (1.33)** –3.75 (1.30)***
Control Variables
Bid round 0.22 (0.04)*** 0.23 (0.04)*** 0.22 (0.04)***
Cash balance ($100K) –1.13 (0.52)* –1.08 (0.52)** –1.14 (0.52)**
Bidder random effects yes yes yes
Wald Chi-squared 49.5 54.7 52.1
Mean response 8.4 8.4 8.4
Observations 1,520 1,520 1,520
DF 5 5 5
Note: Repeated measures mixed models with random effects via restricted maximum like-
lihood method. Prior partner bid is an indicator for >90% of Nash (7–1), actual opponent
markup (7–2), and visible bid as a percentage of bidder’s own bid (7–3). Shown for scenar-
ios 1–4; all bidders (including outliers and partners). Standard deviations in parentheses.
∗
<.10,
∗∗
<.05, and
∗∗∗
<.01.
Revisiting Nash Bidding

Finally, we return once more to our benchmark scenarios around cost disadvantage.
In the previous section, we document some of the myopic tendencies of bidders
with respect to their prior outcome. We apply the same idea to those sessions where
we have theoretical predictions. We include Prior Partner Bid as an explanatory
variable (Table 7) and include three different specifications for that measure—as an
indicator variable based on whether their prior opponent’s markup was greater than
90% of the theoretical optimum (7–1), as a continuous variable measuring their op-
ponent’s actual markup percentage (7–2), and as a continuous variable representing
a pseudo-markup based on the visible values revealed in the auction (correspond-
ing to the percentage their opponent’s bid was over their own bid, 7–3). The first
Wooten et al. 507
two correspond to implicit measures that a bidder might intuit; the last measure is
more salient and correlated with our measure of interest. In all cases, a positive co-
efficient indicates marking up the next bid more when the opponent’s last bid was
higher. We observe positive, significant coefficients on both Prior Partner Bid and
Bid Round, indicating that bidders are learning over time and from their opponent’s
previous action. The derived Nash equilibrium markups (section THEORETICAL
PREDICTIONS) are conditional on your opponent bidding optimally. Obviously,
if they are bidding below Nash, your response will change. We capture that dy-
namic here. Our results are robust to various specifications of previous opponent
markups as well as excluding outliers, with mostly similar results throughout.
DISCUSSION AND CONCLUSION

This paper contributes in two main ways. It is the first paper to experimentally
test bidder behavior in cost advantage procurement auctions with uncertainty (as
modeled by Rothkopf et al., 2003). It is also the first to introduce multiple auction
asymmetries in order to answer the question “Can information asymmetries help
bidders overcome cost disadvantages?” Furthermore, our two information types—
a cost precision advantage and a competitor knowledge advantage—can be gener-
alized and thought of on a two-dimensional scale of private and common informa-
tion, similar to Gal-Or (1986). For both types, the knowledge concerns estimation
precision. A bidder always knows their own precision (private). In some cases,
you may also discern competitor precision, at which point that info becomes com-
mon to both parties. In this way, these results may generalize to other private and
common information asymmetries.
Implications for Procurement Auction Sellers

The PV literature has demonstrated that a cost-advantaged seller will realize no-
ticeably greater profits than a cost-disadvantaged seller. The CV literature has
demonstrated that the seller with more precise cost estimates will realize greater
profits. Our research design allows us to test whether having one of these advan-
tages is sufficient to overcome not having the other. In our experiment, winning
bids result in a profit that may be positive or even negative because uncertainty
over projects costs may result in a seller winning a bid when their cost estimate is
biased downward. If the bidding strategy used by the winning bidder is not suffi-
cient to overcome the biased cost estimate, the result is the well-known winner’s
curse. Normally associated with the CV literature, any uncertainty over actual costs
in a PV setting can also lead to this phenomenon.
In terms of results, we find that bidders in the lab are more aggressive
than normative theory would predict. We also find that they move closer to
Nash equilibrium markups over time. For asymmetries, we show that being cost
disadvantaged does indeed hurt performance and that precision and information
asymmetries result in opposite effects than the literature shows in single asym-
metry settings. We explain that this is likely the result of our novel two-symmetry
setup, which results in the opposite dynamic thanks to these asymmetries being ap-
plied to the disadvantaged party instead of the advantaged one. We also conjecture
that full information transparency—long the staple in auction research—is likely

unrealistic and unhelpful (similar to Dyer and Kagel [1996] and Wooten et al.
[2020]). Finally, looking at bidder behavior, we document how the situation
matters and bidders react myopically to prior rounds.
The implication for bidders is that cost-disadvantaged firms can become
more competitive by improving their cost estimation process. Although our nu-
merical simulation (Figure 1) predicts that improved competitiveness should come
mostly from reducing the profitability of the cost-advantaged bidder (and not im-
proving one’s own profitability), bidders in the lab did increase their profitabil-
ity in all three situations when precision improved (Table 3). The dynamics of
real-world bidding that likely accounts for this discrepancy is persistent, aggres-
sive bidding (by both parties) and the reduction of winner’s curse as estimation
precision improves (Table 6). Cost-disadvantaged bidders should also react less
myopically—especially to losses. For every level of precision tested, bidders re-
duced their markup after a loss (Figure 4). Chasing wins, instead of recognizing
the benefit of losing with a downward-biased estimate, can lead to bad outcomes.
Second, time spent learning competitor estimation abilities may not be worth the
effort—in fact, it may be detrimental. This echoes a key finding from Wooten et al.
(2020), where full transparency leads to information overload.
Implications for Procurement Auction Buyers

Knowing these bidder behaviors, what is the impact on the auction holder? It is
well known that in a traditional auction with symmetric bidders, releasing more
information will increase revenue for the auction holder. However, when bidders
are asymmetric, one bidder possessing the information (Milgrom & Weber, 1982;
Englebrecht-Wiggans et al., 1983; Hendricks & Porter, 1988) or better-quality in-
formation (Laskowski & Slonin, 1999) in a FPSB auction reduces the auction
holder’s revenue. This asymmetric situation results in information rents for the
advantaged bidder, which they exploit to collect higher expected profits.
Framed a different way, the auction literature dictates that asymmetries that
move the bidders farther apart (e.g., extra information to the advantaged seller)
hurt the auction buyer and that asymmetries that bring the bidders closer together
help the buyer. We find evidence of results that move in the opposite direction.
This is shown in Table 8, with average procurement cost for the lab auctions (as
a percentage of the advantaged bidder’s actual cost, to normalize across project
sizes). Moving from the middle (scenarios 5–7) to the left, we would expect to
see higher (worse) costs for the buyer thanks to giving the advantaged bidder even
more information. However, we see better (lower) costs. Moving from the middle
(scenarios 5–7) to the right, greater cost asymmetry works as expected, giving the
advantaged bidder more power.
Additionally, it is equally well known that in asymmetric procurement auc-
tions, reducing uncertainty around bidder estimates will increase auction holder
revenue (Gilley & Karels, 1981; Hausch, 1987; Rothkopf et al., 2003). This is
due to more aggressive bidding. For changes in cost estimate precision, it is not
immediately clear what benefits the buyer. One argument is that reduced uncer-
tainty lowers the procurement cost until the disadvantaged bidder has overcome
Wooten et al. 509
Table 8: Average procurement cost for buyer (as % above actual cost for
seller A).
Scenario 2–4 Scenario 5–7 Scenario 8–10
d = 1.05 d = 1.05 d = 1.1
CVd % Info = both Info = Seller D Info = Seller D
10 4.8 5.7 7.8 Improved CVd

5 3.2 6.5 10.6 changes dynamics
0 4.7 5.1 9.5 (inconclusive)
Average 4.2 5.8 9.3
Additional market info Greater cost asymmetry

helps buyer hurts buyer
their disadvantage (essentially, better CVs only help the buyer while they are
equalizing bidder profits). Unfortunately, the reality seems to be a bit more
complicated than that, and no clear trends are apparent in our results. This is a
limitation of the study, as we designed it to focus on the bidders. We leave the
investigation of this phenomenon on the buyer’s side to future research.
Practically, it seems that buyers should seek to reduce cost asymmetries (e.g.,
sharing best practices and disseminating preferred subcontractors) and make mar-
ket information available (i.e., allow firms to understand each other’s estimation
precision). Both of those reduce procurement costs. Additionally, if buyers are
dealing with experienced bidders or those that display bidding tendencies that ap-
proach the theoretical predictions, then improving the precision of the disadvan-
taged bidder’s cost estimation capabilities may also help.
Summary
In real-world procurement auctions, buyers recognize that auctions can be asym-
metric. There are plenty of examples where buyers have attempted to help disad-
vantaged bidders (often for their own benefit). Subsidies are one approach to that
problem; set-asides are another. Many governments maintain set-aside thresholds
to award auctions to small businesses—in the United States, most federal agencies
try and spend at least 23% of their procurement budget on small firms; in Japan,
that target was 50.1% for small and medium firms in 2007 (Nakabayashi, 2013).
Such sizeable percentages indicate the effort being spent on methods to reduce pro-
curement auction asymmetries. Here, we present some additional tools that can be
used.
As the first investigation of this kind, there are some limitations to the study.
First, dealing with multiple asymmetries for which normative models cannot be
solved led us to benchmark our theoretical results for those cases through numer-
ical solutions. Second, as a practical limitation, we could only test so many levels
of the treatment variables in the initial study. Subsequent studies could focus on
particular focal areas (e.g., more granular precision intervals) in order to derive
additional insight.
In conclusion, we find that some information can help cost-disadvantaged

bidders compete in asymmetric procurement auctions. Information advantages re-
lated to cost estimate precision were beneficial to bidders. Information advantages
related to market understanding were not. Firms that have higher costs seem to
have tools at their disposals to compete—as long as the cost disadvantage is not
too great. This knowledge, when combined with other studies on procurement auc-
tions, can further elevate our understanding of asymmetric auctions and how bid-
ders (and auction holders) can improve their results.
SUPPORTING INFORMATION
Additional supporting information may be found online in the Supporting Infor-

mation section at the end of the article.
Supporting Information
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Wooten et al. 513
Joel Wooten is an assistant professor of management science at the University of

South Carolina’s Moore School of Business. His recent research focuses on contest
mechanisms, in both innovation tournaments and procurement auction settings.
Sanghoon Cho is a doctoral student of management science at the University of

South Carolina’s Moore School of Business. His research focuses on data-driven
operations management, empirical revenue management, and social media analyt-
ics.
Tim Fry is a professor of management science at the University of South Car-

olina’s Moore School of Business. His recent research focuses on behavioral pro-
curement auctions and their associated mechanisms.
Joan Donohue is an associate professor of management science at the University

of South Carolina’s Moore School of Business. Her recent research focuses on
procurement auction bidding and operations management research practices.

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Decision Sciences © 2020 Decision Sciences Institute.

Overcoming Cost Disadvantages in

Subject Areas: Asymmetric Information, Cost, Experiment, and Procure-

private endowments to a set of numerically simulated predictions. Finally, we an-

RESEARCH FOCUS AND THEORY

being overly restrictive—suggesting that other, more realistic distributions need to

where m represents a common shape parameter.

m[1 + 1/X (d)]1/m

Figure 1: Numerical predictions: Overcoming cost disadvantage with precision.

However, layering in more heterogeneity makes it highly unlikely that a closed

Experimental Setup and Protocol

Table 1: Experimental design.

Scenario Subjects d CV (%) CV Info CV (%) CV Info Asymmetry

1 18 1.05 12 Both 12 Both Cost

Cost Estimate Precision

Figure 2: Forecast error by Fortune 100 firm in procurement auctions.

with mean and variance:

Market Understanding (of Competitor)

Table 2: Example markups from a participant for outlier identification.

1 35.8% 6 30.7% 11 3.1% 16 97.0%*

ANALYSIS AND RESULTS

Scenario Seller d Seller a Average

1 0.23 0.22 0.23

Cost Cost Cost

Theory 1 1.05 12 Both 12 Both 17.9 21.1 ***

Figure 3: Average markup by round: Cost and precision asymmetries (theoretical

Overcoming Cost Disadvantage (with Precision and Market

Table 4: Analysis of performance outcomes (profit).

Dependent variable % Profit % Profit % Profit

Constant –1.28 (0.86) –0.22 (0.88) 2.03 (1.05)*

Figure 4: Impact of prior outcome on next markup—with estimation precision.

These myopic adjustments are predicted by learning direction theory based

Table 5: Analysis of bidder behavior (markup).

Dependent variable % Markup % Markup

Constant 13.80 (1.15)*** 20.03 (2.55)***

Table 6: Frequency of negative profit and negative markup.

Winner’s Negative Winner’s Negative

Table 7: Analysis of bidder response to Nash bidding (scenarios 1–4).

Dependent variable % Markup % Markup % Markup

Constant 13.45 (2.78)*** 13.10 (2.78)*** 13.26 (2.77)***

Revisiting Nash Bidding

DISCUSSION AND CONCLUSION

Implications for Procurement Auction Sellers

that full information transparency—long the staple in auction research—is likely

Implications for Procurement Auction Buyers

10 4.8 5.7 7.8 Improved CVd

Additional market info Greater cost asymmetry

In conclusion, we find that some information can help cost-disadvantaged

Additional supporting information may be found online in the Supporting Infor-

Gal-Or, E. (1986). Information transmission—Cournot and Bertrand equilibria.

Joel Wooten is an assistant professor of management science at the University of

Sanghoon Cho is a doctoral student of management science at the University of

Tim Fry is a professor of management science at the University of South Car-

Joan Donohue is an associate professor of management science at the University

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Constant 13.80 (1.15)* 20.03 (2.55)*

Constant 13.45 (2.78)* 13.10 (2.78)* 13.26 (2.77)***