2020, Wooten2

Vol. 29, No. 7, July 2020, pp. 1679–1701 DOI 10.1111/poms.
13174
ISSN 1059-1478|EISSN 1937-5956|20|2907|1679 © 2020 Production and Operations Management Society
To Thine Own Self Be True: Asymmetric Information

in Procurement Auctions
Joel O. Wooten*, Joan M. Donohue, Timothy D. Fry, Kathleen M. Whitcomb
Moore School of Business, University of South Carolina, Columbia, South Carolina 29208, USA,
joel.wooten@moore.sc.edu, donohue@moore.sc.edu, timfry@moore.sc.edu, whitcomb@moore.sc.edu
s procurement auctions increasingly move to digital platforms, more data and information is available (or can be
A made available) to bidders. Despite this trend, relatively little is known about the impact of information asymmetries
in these settings. We investigate two such differences in first-price sealed-bid reverse auctions with a common value. In a
design that mirrors real construction procurement auctions, our laboratory experiment tests the impact of the precision of
a bidder’s cost estimate and the degree to which bidders know the inherent cost estimate precisions in the auction. We
find that more understanding of estimate precision decreases bidder profit, counter to our expectation; however, we also
find evidence of strategic behavior from those bidders that ratchets up pressure on competitors and pushes competitors
toward bankruptcy. Most notably, understanding just one’s own precision can help avoid the winner’s curse in some set-
tings. The same result does not apply if bidders also know their competitor’s precision; more information does not help.
The implication from our realistic setting—that reduced uncertainty may not help the bidder—raises important questions
about the degree of transparency that is optimal in procurement auctions.
Key words: procurement auction; winner’s curse; asymmetric information; experiment
History: Received: September 2017; Accepted: February 2020 by Elena Katok, after 3 revisions.
Bidders in procurement auctions estimate their cost

1. Introduction to deliver on the contract up for auction and then sub-
Procurement auctions represent an increasingly mit bids representing the price they require. In this
important vehicle for the exchange of goods and ser- study, we analyze the effect of two types of informa-
vices in modern economies, and web-based tech- tion asymmetries that can exist for bidders—the preci-
nologies are a recent enabler of this trend. As an sion of their cost estimates and the degree to which
example, the White House Office of Federal Procure- they possess competitive intelligence about cost esti-
ment Policy has moved large portions of govern- mates (for themselves and others). If one bidder has
ment sourcing to electronic procurement auctions less error when estimating costs (resulting in a smal-
and reported saving 12% on more than $800 million ler range of possible estimates) or knows something
in acquisitions (across just four agencies) during fis- about a competitor’s ability to accurately estimate
cal year 2012 (Rung 2015). Such trends extend costs, those asymmetries may have consequences for
beyond the public sector; the Center for Advanced both the bidder and the buyer. Mathematical models
Purchasing Studies reports that more than 40% of for auctions with asymmetric information structures
large North American firms use procurement auc- are often represented by a series of nonlinear ordinary
tions for purchasing (Beall et al. 2003), and the glo- differential equations that, unfortunately, cannot be
bal volume of such purchases via electronic solved directly except for the simplest of cases (Fibich
platforms is on the magnitude of hundreds of bil- and Gavious 2003) or by stipulating restrictive
lions of euros (Plant 2004). This technology shift in assumptions (Cheng and Tan 2010, Hausch 1987). As
the auction landscape can result in more available such, the analysis of these asymmetric information
data and information for bidders due to the digital auctions is much more difficult than (the more widely
platforms being used. However, more availability examined) symmetric information auctions and com-
does not necessarily mean more parity—bidders paratively little is known about them. Researchers
may differ in terms of experience, analytical ability, have recently begun exploring the intricacies of such
access to information, etc. Despite the growing reli- asymmetries with respect to feedback (Elmaghraby
ance on technology-enabled auctions, relatively little et al. 2012), valuation distributions of the bidders
is known about the impact of information asymme- (Aloysius et al. 2016, G€ uth et al. 2005, Maskin and
tries on the strategy and performance of bidders in Riley 2000), and competitive information (Grosskopf
procurement auctions. et al. 2018, Kim 2008). Our paper adds to this
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Wooten, Donohue, Fry, and Whitcomb: Asymmetric Info in Procurement Auctions
1680 Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society
literature by further exploring asymmetries specifi- to match a number of observed elements. We obtain
cally in common value auctions, in which bidders and analyze two sets of real auction data—South Car-
value the auctioned item identically but may have dif- olina Department of Transportation (DOT) bid data
ferent information about that value. and cost estimate plus bid data from a Fortune 100
We investigate the consequences of asymmetric industrial company—to set the parameters in our
information via a laboratory experiment using first- design. Second, tying key experimental characteristics
price sealed-bid (FPSB) procurement auctions with a to real auctions boosts external validity, since the
common value. In the FPSB format, the lowest bidder results we identify are more likely to actually exist
is declared the winner, with only the buyer aware of outside the laboratory. While it may not always be
who submits bids and the bid amounts. In common feasible or desirable, calibrating to real-world com-
value settings, no agent knows the true cost to pro- mon value auctions helps us explore the different
duce the product or service, but each has an informa- asymmetry types that exist in real data.
tion signal as to what the cost might be. This results in We investigate if (and to what extent) increased
a setup where bidders can deliver for the same cost access to information (as is available in many online
but the precision of their estimates for that cost may auctions) affects auction outcomes. Our experimental
vary. Well-known examples of FPSB procurement setup allows for detailed behavioral analysis to
auctions with common values include federal off- address these questions, and we uncover several
shore oil and gas drainage lease sales (Hendricks and interesting bidding behaviors. The most notable sug-
Porter 1988), fine art auctions where the intent of the gests that competitor information may not always be
buyer is to resell the art (McAfee and McMillan 1987), beneficial to bidders. We find that both profit and
US Forest Service auctions (Athey et al. 2011), com- propensity to avoid the winner’s curse are higher
mercial construction (Dyer and Kagel 1996), and pub- when, pre-auction, bidders only have an understand-
lic utility/highway construction projects (Hong and ing of themselves and not their competition. Some-
Shum 2002, De Silva et al. 2008). what counterintuitively, focusing on one’s self—with
Our experiment systematically studies two types of no knowledge of how the rest of the market may bid
information asymmetries that exist in such common or their capabilities—proves to be better in certain sit-
value auctions. (1) First, we vary bidders’ cost esti- uations. As our experimental setup was chosen to
mate precisions over two levels—low and high. (2) Sec- mirror real procurement auctions, this raises some
ond, we allow for varying degrees of understanding interesting questions about how auctions should be
about the cost estimate distributions in the market— optimized for both bidder and buyer.
none, partial, or full. In the none case, bidders know
only their own cost estimate. In the partial case, bid- 2. Literature and Hypothesis
ders know their own cost estimate plus the distribu-
tion from which that estimate was drawn. In the full
Development
case, bidders also know the distribution used to gen- This section reviews the literature on procurement
erate their competitor’s estimate, permitting some auctions, focusing on understanding bidder behavior
understanding of the relative estimating advantage in asymmetric auctions and—specifically—common
between the two bidders. value scenarios. Our objective in this section is to
We calibrate the parameters of our experiment develop four empirical hypotheses that will serve as a
using real auction data, making our laboratory ses- guiding set of predictions as we explore the impact of
sions closely mirror what is observed in the field. asymmetric information.
While such calibration is not always warranted (e.g.,
when laboratory experiments are used to test analyti- 2.1. Procurement Auctions
cal models, parameters need to be a good match for The emergent literature on bidding behavior in pro-
the model instead of the real world), it has several curement auctions with private and common values
benefits for our particular investigation. First, it is increasing. Although some studies have shown that
allows us to explore these information asymmetries in factors other than price (such as firm reputation) are
a setting as they would actually exist. As Dyer and sometimes considered (Brosig-Koch and Heinrich
Kagel (1996) astutely observe, simplifications in the 2014, Haruvy and Katok 2013, Jap 2007), it is still com-
auction literature have typically resulted in conditions mon for the lowest bid to be declared the winner (De
that deviate from reality and may explain some of the Silva et al. 2008, Flambard and Perrigne 2006, Li and
inconsistencies between research and practice (e.g., Philips 2012). Some of the recent attention stems from
the inability to avoid the winner’s curse in laboratory unanticipated results in behavioral settings where
settings). Recent studies have calibrated experimental experimental results deviate from predictions made
parameters such as the number of bidders (Grosskopf by theoretic models. As an example, first-price auc-
et al. 2018), and we similarly design our experiments tions with private values appear to generate lower
Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society 1681
purchase prices for the buyer than second-price auc- asymmetry—in FPSB common value auctions. They
tions (Maskin and Riley 2000, Kirkegaard 2012) — find (both experimentally and through a bounded
even with shift asymmetries in place (Aloysius et al. rationality approximation) that when one bidder has
2016) —thanks to bidding that is too low. This mirrors an exact signal about value and other bidders rely on
practice but reverses the pattern that theory predicts a signal from a range of possibilities, those with exact
in asymmetric settings. A similar aberration appears info (the insiders) earn higher profits when they win.
when information is uncertain. Less specific bid feed- All bidders in this setup also have full transparency
back (given as bid ranks instead of actual bids) results into how each bidder’s signal is determined (but not
in procurement bids that are lower in many scenarios the realization of others’ signals). Similarly, Grosskopf
thanks to bidder impatience (Elmaghraby et al. 2012) et al. (2018) look at the FPSB common value setting
and that increase the probability of a high-cost bidder and—instead of insiders with an exact signal vs. out-
winning the auction over a lost-cost bidder (Elbittar siders with a range—experimentally test insiders with
2009). While these examples occur in the private value a range of possibilities vs. outsiders with a much lar-
procurement setting, they highlight that bidder ger (and publicly available but uncentered) range and
behavior can be difficult to predict. This may be even find the insiders perform better. In both cases, unsur-
more true in common value settings—where the rev- prisingly, the bidders with more precise estimates
enue equivalence theorem of auction formats does not make more profit than their less-informed counter-
hold (Cheng and Tan 2010, Thompson and Wright parts. Our setting differs in that normal distributions
2004). We limit our hypothesis development below to substitute for uniform and there is more uncertainty
the smaller set of papers dealing with asymmetric in terms of competitor information, but we expect nei-
auctions in common value settings. ther of those to matter. It has been demonstrated that
In common value procurement auctions, informa- a small advantage in an almost common value auction
tion about the cost to deliver the requested good or (where the private values are relatively small com-
service can take several forms (Figure 1). Early work pared to the common value) can significantly tilt the
looks at the symmetric uniform case, where bidders each auction toward the stronger bidder (Klemperer 1998).
receive a private information signal, ci, randomly Even small advantages enable bidders to earn dra-
drawn from a uniform distribution on [C – e, C + e] matically more profit. Our first prediction simply fol-
(Dyer et al. 1989, Thaler 1988). Each estimate can be lows these basic tenets from the common value
different, but the underlying distributions are identi- auction literature.
cal. In asymmetric uniform cases, insider information is
superior to outsider information (eI < eO), leading to HYPOTHESIS 1. Better cost estimating ability (having a
information signals drawn from more precise estimate precision advantage) will lead to better performance in
ranges. One derivation of this idea appears in experi- common value procurement auctions.
ments as a perfect signal for insiders (eI = 0) (e.g.,
Kagel and Levin 1999). While several works describe While our first question addresses a bidder’s esti-
real-world common value cost estimate distributions mating precision, our second studies the effect of
as normal (Bazerman and Samuelson 1983, Goeree explicitly knowing the degree of precision. Does
and Offerman 2003) and advocate for creating bidding knowing how well you estimate costs (and not just
environments that are representative of auctions in the experiencing it) matter? While the availability of infor-
field (Dyer and Kagel 1996), no experiments test asym- mation has long been a key issue in auction research,
metric normal cost estimates in this setting. We specify we mirror the uncertainty that exists in many real mar-
our cost estimate asymmetry to be of this type. kets by not having each bidder’s information scenario
publicly known. This is quite different from many the-
2.2.. Implications for Common Value Procurement oretic models and auction experiments, which tend to
Auctions assume full information transparency about each bid-
Our first question examines the effect of precision in a der’s information state and the distribution from
bidder’s cost estimate. Results in common value which their costs are drawn (as in Grosskopf et al.
asymmetric auctions are not well developed, in part 2018). Consider the study by Kagel and Levin (1999)
because the results depend on the particular specifica- where, pre-auction, the better-informed bidder knows
tion of the asymmetry. Here, we focus on a precision the exact value of the auctioned good, the fact that
asymmetry (Figure 1) in which bidders can deliver their estimate is exact, and the distribution of their
the product or service for the same cost (common competitor’s cost estimate. The less-informed bidder
value) but may have cost estimates of varying preci- knows their estimate of the common value and the dis-
sion. In a seminal study of asymmetric auctions, tribution from which it comes as well as the fact that
Kagel and Levin (1999) examine the impact of one their competitor knows the exact value. Post-auction,
bidder being better informed—an information both bidders see all estimates, all bids, and any
Figure 1 Illustration of four Types of Cost Estimate Precisions in Common Value Auction Papers
Symmetric Uniform Symmetric Normal Asymmetric Uniform Asymmetric Normal

Dyer et al. 1989, Thiel 1988, Hausch 1987,
Kagel et al. 1989, Paarsch 1992, Kagel & Levin 1999,
Foreman & Murnighan 1996, Wilson 1998, Laskowski & Slonim 1999,
Holt & Sherman 2000, Lunander 2002, Mares & Shor 2008
Kagel & Richard 2001, Goeree & Offerman 2003,
Goeree & Offerman 2002, Thompson & Wright 2004
Grosskopf et al. 2018
Notes: Representative sample of papers. There is a fifth type that includes some private value elements, where an insider relies on private
info drawn from the uniform distribution [C – e, C + e] and an outsider relies on the common public info that C is drawn from some lar-
ger, uniform range [xL, xH] not centered on C (as in Grosskopf et al. 2018).
realized profit. In real auctions, such utter trans- Our third question examines the effect of knowing
parency is unlikely. Thus, we turn to more uncertain si- a competitor’s bidding precision. Kagel and Levin
tuations where the bidders nevertheless know (2008) note the general result that the addition of pri-
something about their own abilities. Looking at empir- vate information leads to higher bidder profit (and
ical evidence from 7500 Utah construction procure- lower buyer profit), since better-informed bidders can
ment auctions, Li and Philips (2012) find that bidders extract more surplus from the auction. This robust
who are incumbents in the market have less variance result relies on the insider construct, where a more
in their bids and also bid less aggressively (making informed bidder uses private info (about the cost or
more money in the process). This reasonably repre- value of the auctioned item) to best the bidder with
sents the scenario we are studying. New market less (or public) info. Intuitively, these bidder out-
entrants do not know as much, lack experience, are comes make sense. However, this type of information
seeking a foothold in the market, and experience the looks more like a precision advantage (Hypothesis 1)
opposite results (more variance, more aggressive bids, than market knowledge. Instead of changing a bid-
and less money). We expect this setup to function in der’s actual value of the item, knowledge of a com-
much the same way as knowing precision and for petitor’s situation likely changes a bidder’s strategy.
more information to again lead to higher profit. Two Engelbrecht-Wiggans (1986) stresses the difference
tangential papers suggest this outcome, although ours between precision knowledge and market knowledge,
is the first we know of that explicitly tests this idea. with market knowledge (about the information your
Hausch (1987), for example, shows that as the less- competitor possesses) resulting in a potentially differ-
informed bidder gets better information, bidder rev- ent strategic state, even with the same information
enue improves in cases where the advantaged bidder about the cost estimate; and increased profit if you
is neither strictly better informed nor perfectly know the information your competitor possesses. This
informed. Another conjecture is that success in com- suggests that knowing your competitor’s precision
mon value auctions in practice (as compared to the might confer an advantage.
laboratory) comes from acquiring and using detailed However, there is some ambiguity around the
knowledge from a particular auction market (Dyer impact of information in common value auctions.
et al. 1989). Our second prediction echoes these Campbell and Levin (2000) demonstrate that it is pos-
notions of improved performance through knowledge. sible for bidders with more information to make less
profit thanks to strategic interactions. Kim (2008)
HYPOTHESIS 2. Explicitly knowing one’s own estimating extends this finding and proves that information visi-
ability (knowing the precision and not just experiencing bility can either increase or decrease bidder profit
it) will lead to better performance in common value based on the properties of the signal (but competitor
procurement auctions. profit collapses toward zero in all cases); however,
this applies to visibility into an opponent’s exact cost. improves that cost estimate, their bids will become
It is unclear if the same might apply to less specific more aggressive. Changing the degree of information
market knowledge. A simplistic approach might be to present, however, might induce more or less aggres-
argue for a null hypothesis and let the data reveal the sive bids. There is some evidence that additional pri-
situation for our specific common value auction. vate information about the common value being bid
However, that ignores the body of auction literature on results in more aggressive bids (Brocas et al. 2017,
that generally stresses the benefit of more informa- Grosskopf et al. 2018) —but this looks a lot like an
tion. Dufwenberg and Gneezy (2002) observe that bid- improved cost estimate. None of these perfectly iso-
ders in possession of the full vector of bids from the late the degree of market knowledge and its impact.
prior round make more in common value auctions We predict that knowing you are disadvantaged—as
than bidders who only see their own bids (or their opposed to simply being disadvantaged and not
own bid and the winning bid) in the prior round. On being aware—will increase salience of the disadvan-
balance, we believe there is more evidence that mar- tage and increase the likelihood of behaving like an
ket knowledge (of a competitor’s precision) might inexperienced bidder.
benefit strategic bidding and lead to greater ability to
extract value. That leads to our third hypothesis. HYPOTHESIS 4. Disadvantaged bidders will bid more
aggressively as they become more aware of their disad-
HYPOTHESIS 3. Knowledge of competitors’ estimating vantaged position (as market knowledge increases) in
abilities (their precision) will lead to better performance common value procurement auctions.
in common value procurement auctions.
Separating out these two types of information (pre-
Finally, we are interested in exploring how our two cision and market knowledge) is important to fill a
information asymmetries—precision and understand- gap in the asymmetric auction literature and, cru-
ing (of precision)—jointly impact bidder behavior. cially, setup our behavioral experiments. We test
Instead of profit, we focus on the choices bidders these four hypotheses using a laboratory experiment
make and how aggressive they are with their bid design based on parameters found in real procure-
markups. Aggressive markups in common value auc- ment auction data and focus on the behaviors exhib-
tions result in part from behavioral artifacts: na€ıve ited by bidders in order to explain the results
bidding (i.e., strategic discounting) and risk aversion obtained.
(Holt and Sherman 2000), but also lack of experience
(Kagel and Richard 2001) and reduced uncertainty
(Goeree and Offerman 2003). Auctions with inexperi-
3. Experimental Design
enced or disadvantaged bidders reveal a tendency to We conduct a set of experiments to explicitly test
have high rates of the winner’s curse, where the win- behavior in procurement auctions in response to vary-
ning bidder loses money, especially in instances ing levels of information asymmetry. Each of two bid-
where feedback and learning are not available to help ders competes as a contractor attempting to secure
deter overly aggressive bidding (Kagel and Levin contracts for road construction projects in a series of 25
2008, 1999). This phenomenon exists in real procure- sealed-bid first-price auctions with common values.
ment auctions for both oil and gas leases (Hendricks We randomly match bidders each round—one from
and Porter 1988) and construction projects (Li and each of a session’s two treatment groups. Bidders have
Philips 2012). the same treatment type (and bid against the opposite
Part of this stems from the fact that weak bidders type) for the entire session. The treatments reflect the
bid more aggressively when facing strong bidders information available to bidders along two dimensions
(Banerjee 2005, Kagel and Levin 1999). This response —precision and understanding (of precision in the
to occupying the inferior position is intuitive. How- market). Our laboratory experiments run in two
ever, there is some evidence that the nature of the batches: the first examines our two dimensions of
asymmetry impacts the response. Banerjee (2005) information availability in common value auctions; the
shows that aggressive bidding may result from infe- second probes the behavioral findings from the first
rior information, but that the effect is ambiguous. If and attempts to explain the results obtained.
an asymmetry is reduced through more precise cost
estimates for the disadvantaged bidder, more aggres- 3.1. Calibrating Parameters To Real Procurement
sive bids result (Banerjee 2005, Goeree and Offerman Auctions
2003). If, however, the asymmetry is reduced in other As mentioned, building the experiment to mirror real-
ways, the impact is ambiguous and could yield more istic parameters found in actual procurement auctions
or less aggressive bidding (Banerjee 2005). This sug- is important here. We do that by analyzing historical
gests that if a bidder with a less precise cost estimate South Carolina DOT procurement auction data and
internal sourcing data from a Fortune 100 industrial Figure 2 Forecast Error by Fortune 100 Firm in Procurement Auctions
firm and aligning three important elements with those
data sets—the cost of projects, the cost estimates for
bidders, and the number of bidders. In total, the DOT
data represent 14,855 bids for 3960 projects submitted
Count
by 390 different firms from 2003 to 2015. Road con-
struction bidding is a classic common value setting
and is the backdrop for our experiment. The smaller
set of data represents 905 cost estimates, bids, and
actual costs for sourcing projects won in a Fortune 100
firm’s industrial division from 2014 to 2016. Together,
the two data sets provide a great deal of information
about how procurement auctions unfold in real com-
mon value auction settings. % Error of Cost Esmates, winning bids
In terms of project cost, we do not observe the
firms’ costs to complete the DOT projects, so we use
submitted bids as a surrogate for cost estimates Figure 3 Distribution of DOT Bids Relative to Mean Project Bid
(which assumes that industry markups are somewhat
consistent between competing firms). As one might
expect, DOTs host a wide range of projects, and win-
ning bids in our data span $9200 to $97.9 million.
However, most projects were awarded for less than
Count
$700,000 and appear fairly uniform in their distribu-

tion across two ranges ($100K–400K and $400K–
$700K). We decided to model our experiment on the
lower of these ranges because it represents the most
common size of project in the data set and the magni-
tude of the dollar amounts are not too large to be tan-
gible and cognitively manageable for subjects. Thus,
our actual project cost is uniformly selected from a Z-score for Project Bids
range of $100,000–$400,000 for every bidder pair at
the start of each new round. This is the most innocu- Note: Shown for projects with five or more bids; similar for a vari-
ety of cutoffs and drill downs.
ous of our aligned elements since the project cost
should be independent of the mechanism being
tested. Regardless, this mirrors a common group of Figure 4 Historical DOT Bid Dispersion
projects in the DOT data and is also similar to the
average size of the Fortune 100 firm’s projects.
Second, we create realistic cost estimates for bid-
Notes: Bidder CV (%) calculated on standardized bids for a firm
ders. For mathematical ease, the value signal (i.e., cost
across projects. Project CV (%) calculated on bids received for a
estimate) is often assumed to follow a uniform distri-
project across multiple firms. Federal guidelines define competi-
bution (in both the theoretical and experimental liter- tive bids as those not more than 20% over the low bid.
ature). However, we use a normal distribution. In this
way, we model a more realistic bidding environment
as suggested by Dyer and Kagel (1996). We corrobo-
rate this choice with the Fortune 100 firm’s procure- common value auction bidding mechanisms. In order
ment auction data, which shows the distribution of to employ these functions to predict costs, we also
cost estimate errors is bell shaped in Figure 2. need some measure of the shape or dispersion. We
As this includes only winning bids, we look to our again run into the issue of not observing the cost esti-
other data set for further evidence. The DOT procure- mates firms relied on when bidding for DOT projects,
ment auction data in Figure 3 shows the distribution so we use bids as a proxy with the same assumptions
of all bids is bell shaped. Under most plausible condi- as before. As seen in Figure 4, we benchmarked bid
tions,1 this implies that the cost estimates relied on by variation in two ways—for bidders and for projects.
those firms were likely drawn from a bell-shaped dis- We look at bidders to see how bids from the same
tribution, which adds further evidence for using a firm deviate (as standardized bids) and at projects to
normal distribution. Goeree and Offerman (2003) also see how bids from different firms are distributed for
use a normal distribution to investigate realistic the same contract. Inexperienced bidders have more
variation (as expected). In our pilot study (which fea- 3.2. Experimental Setup
tured two graduate students going through each of Participants were undergraduate business students
the eight scenarios), we tested coefficients of variance representing a variety of majors. They were recruited
(CV) at three levels—3.5%, 8.0%, and 12.5%. The from multiple sections of the introductory operations
smallest CV (3.5%) was included in addition to the management class at a large US business school. Par-
more obvious levels to make sure we had enough ticipants arrived at the computer laboratory for their
variation in our test runs. Results showed the biggest scheduled session, signed in, and were split into two
spread (3.5% vs. 12.5%) to be too much in the pilot treatment groups based on previously determined
study, with big precision spreads dictating the results random assignment. In their separate groups, subjects
completely and discouraging the high-CV partici- were asked to read written instructions. After giving
pants. For the full laboratory experiment, we settled them time to read, we then read summary instruc-
on CVs of 10% and 5% for our baseline and informa- tions aloud to ensure the situation and rules were
tion-advantaged precision, respectively. These also clear. Participants were then seated at computer ter-
correspond nicely with the median CVs from our pro- minals and required to enter identifying information
ject measure for all bids (10.1%) and competitive bids before the auctions began. At the beginning of each
(5.7%) in Figure 4. session, participants ran through five practice rounds
Third, we mirror realism in terms of the number of before beginning the 20 auction rounds.2
bidders. While it is tempting to think of public pro- Each round consisted of the following sequence of
curement auctions as big events with many partici- events. Participants were randomly paired up with a
pants, the median number of competitive DOT bidders participant from the other treatment group. A com-
(those with bids not more than 20% above the low mon project was selected for the pair by choosing a
bid) is 2. Two bidders is also the most frequent situa- value for the actual project cost. That project cost was
tion, and the median overall bidders per project is 3. uniformly selected from a range of $100,000–$400,000
Grosskopf et al. (2018) tout similar evidence from but was not known to bidders beforehand. Then, each
both wildcat and drainage auctions and use two bid- participant got their own unique cost estimate for the
ders in an effort to more accurately represent real- project (prepared by their company’s cost estimation
world situations. The experiment, therefore, looks system) from a normal distribution centered on the
quite similar to what might be experienced by real- actual cost of the project. Along with their cost esti-
world procurement auction bidders along these three mate, some participants received additional distribu-
dimensions. tion information depending on their treatment group.
Figure 5 Illustration of the Structure of Each Round

Figure 6 Sample Information Disclosures by Level of Understanding
Bids were accepted, a winner determined, and the understanding around the accuracy of their own cost
results shown. Losing bidders observed their bid, estimation system (partial understanding), and since
their competitor’s bid, and their (unchanged) cash many procurement auctions post all bids after the
balance. Winning bidders observed the two bids, the winner has been declared, bidders could also model
actual project cost, their profit (or loss), and the the accuracy of their competitors’ estimates (full under-
change to their operating cash balance. An illustration standing). Novice or uninformed bidders would have
of this sequence of events is shown in Figure 5; see no such information about cost estimates (no under-
Appendices A and B for additional details. standing). We operationalize this information asymme-
try by disclosing a proxy of a distribution’s standard
3.4. Treatments deviation.3 In the no understanding case, bidders sim-
An initial batch of eight scenarios was created to ply receive a dollar amount for their own cost estimate,
investigate the effects of asymmetric information in with no information about the estimate’s dispersion or
our procurement auctions. We vary two aspects of the uncertainty. In the partial case, bidders receive their
information signal—the precision (in the form of own cost estimate plus the standard deviation proxy
more accurate cost estimates) and the understanding for that estimate, permitting some understanding of its
(of cost estimate accuracies in the market)—to create uncertainty. In the full case, bidders get all that plus the
those eight scenarios. standard deviation proxy for their competitor’s estimate,
First, we allow the precision of the information signal permitting some understanding of the relative estimat-
to change by adjusting the dispersion of the cost esti- ing precision of the two bidders. An example of these
mate distribution. Each bidder’s cost estimate is gener- disclosure levels is seen in Figure 6. In no cases are bid-
ated from a normal distribution centered on the actual ders told the information their competitor does or does
project cost. Creating a tighter distribution results in a not have. We run a post hoc consistency check
smaller range of likely cost estimates and, therefore, a (Appendix C) to confirm that bidder markups in initial
better estimate on average. Such an advantage is com- rounds conform to expectations for these treatments.
monly associated with more established companies Using these two aspects of the information signal,
that have more practice estimating costs (Dyer and we create and test eight scenarios in the laboratory. In
Kagel 1996). We designate two levels—low precision each scenario, the precision level (low or high) and
(our baseline) with a coefficient of variation (CV) of the understanding level (none, partial, or full) are
10% and high precision (information advantaged) with defined for two groups of bidders. The scenarios are
a CV of 5%. We arrive at those values by analyzing his- laid out to permit answering our primary question—
torical Department of Transportation procurement how does asymmetric information impact the results
auction data, which is detailed in the previous section. in procurement auctions? Figure 7 lays out the sce-
Second, we allow the understanding of cost esti- narios in both a tabular and visual format to highlight
mates in the market to vary between none, partial, the two treatment groups bidding against each other
and full. These levels correspond to the degree to and leading to our 4,852 bids. A treatment group with
which bidders know about the distributions from no understanding around the estimate uncertainty
which cost estimates are drawn. This type of informa- (none) is always used as the base case.
tion advantage mimics the knowledge that firms can
amass through experience and/or effort. It is likely an 3.5. Protocol
experienced firm would analyze its results from past The auctions were all run using the z-Tree software
bidding efforts and develop some level of platform (Fischbacher 2007) and lasted 75 minutes on
Figure 7 Experiment Treatments—Number of Subjects per Scenario counteract the winner’s curse may induce students to
(tabular and visual) opt out and keep the endowment in full. Implementing
bankruptcy rules (e.g., Kagel and Levin (1999) remove
bidders who exhaust their endowment and replace
them with backup bidders) is cumbersome to imple-
ment in the laboratory and introduces a changing pool
of participants (and training and experience). By hav-
ing three fixed prizes for each treatment group, there is
incentive to earn as much as possible—as bidders are
only compared to others in the same role. Since bidders
do not know the cash balance or performance of any-
one else in their treatment and were informed of the
fixed prizes, losing control of poor performers is some-
what mitigated.5 This payout mechanism was used in
Notes: Values listed (for both CV and Understanding) show info all of our treatments, so any differences observed are
for each scenario’s two groups. So the cell showing 46 means half not the result of the incentive scheme.
those participants were 5/Full and half were 10/None. For , we
use the 5 v 10 cell in the analysis (which for None v None, is the
same scenario). 4. Analysis and Results
At the conclusion of the laboratory sessions, we exam-
average. Sessions contained an even number of partic-
ined the data and excluded several subjects who
ipants, evenly split between the two treatment groups
failed to understand the auction experiment. By look-
based on random assignment, and bidders stayed in
ing at the subjects’ bidding behavior, it was possible
the same treatment condition for the entire session.
to identify these exceptions. For example, in scenario
Additionally, a bidder’s opponent was randomly
5, one participant’s average bid was 42.6% below the
assigned from the opposite treatment before each of
given cost estimate, resulting in enormous losses due
the 25 rounds. Thus, participants faced a rotating cast
to winning every round with unreasonably low bids.
of bidders (and knew this), similar to real-world auc-
We identified five such individuals (out of 196) whose
tions, which prevents exploiting idiosyncratic tenden-
bids were not anchored to the given cost estimates
cies of a specific matchup over time.
and excluded them from the analysis. (The excluded
Each round, subjects were asked for their bid on a
subjects bid, on average, 19.0% below their estimated
new project. They were provided a calculator within
cost.) The results we discuss below exclude these five
the platform and scratch paper to perform any com-
unanchored individuals and all of the bids in which
putations. Because pairs were reassigned after each
they participated; we wiped them out of the data.
round, the experiment proceeded in lockstep among
all participants and results were shown only after
everyone had bid. 4.1. Bidder Profit
Prior to the experiment, we ran a pilot with graduate We begin by comparing the profit achieved by bid-
students to test the parameters in our study and make ders. A bidder’s profit each round is determined by
sure our protocol worked as designed. In total, we ran the outcome of the round; winning bids achieve a
196 subjects through the experiment in nine sessions profit (or loss) of the bid amount minus the revealed
(before running additional groups through the follow- project costs, while losing bids earn a profit of $0. Our
up session). They were paid $10 for participating, with primary measure of winning uses percent profit (to
additional prizes of $10, $20, and $30 for the top per- account for projects of different magnitudes) per bid
formers in each of a session’s two groups. As entice- won—so (bid–actual cost)/(actual cost) for winning
ment for signing up, all participants were allowed to bids. Table 1 shows the average percent profit by bid-
complete the experiment in lieu of one of their class’s der for those bids that were won (earnings conditional
online homework assignments. No subject partici- on winning) and the percent of bids won. Looking at
pated in more than one session. We arrived at this fixed profit, differences between the groups are apparent,
incentive scheme in order to motivate the participants with bidders in the more precise groups (CV = 5%)
as best as possible with as few negative consequences. earning significantly more money.
We considered paying subjects based on profit, but in We next report results from a set of robust linear
common value auctions that means taking money growth models so as to capture any learning effects
away from subjects due to winner’s curse. It is not fea- over the course of the experiment (after the practice
sible or appropriate to garnish students’ own money4 rounds) and compare results across treatments.
and providing a large enough endowment to Table 2 shows the differences between treatment
Table 1 Summary of the Observed Experiment Outcomes
Group A Group B
Scenario # Auctions CVA InfoA Win % % Profit/win % Profit/win CVB InfoB

1 140 10 None 54 4.14 (6.34) 6.14 (3.99) 10 None
2 240 10 Partial 51 2.65 (4.18) 0.12 (5.94) 10 None
3 240 10 Full 55 2.79 (2.92) 1.70 (4.93) 10 None
4 160 5 None 57 6.05 (3.65)*** 1.10 (1.49) 10 None
5 198 5 Partial 55 5.58 (4.42)*** 0.60 (5.25) 10 None
6 380 5 Full 49 3.89 (2.98)*** 1.29 (3.82) 10 None
7 240 10 Partial 47 0.80 (2.20)*** 4.22 (2.73) 5 None
8 240 10 Full 53 1.38 (4.27)*** 3.17 (2.55) 5 None
Notes: One and four bidders removed from scenario 5 and 6, respectively, for failure to understand experiment.
Wilcoxon rank sum test shown comparing participant % Profit/win from group A vs. B.
Significance levels: * < 0.10, ** < 0.05, *** < 0.01.
Table 2 Bidder Profit
Group A Group B
A – B contrast A – B contrast
Scenario CVA InfoA CVB InfoB % Profit/win % Profit/bid
1 10 None 10 None 2.61 (2.10) 1.16 (1.03)
2 10 Partial 10 None 3.10 (1.61)* 1.67 (0.79)**
3 10 Full 10 None 0.66 (1.61) 0.61 (0.79)
4 5 None 10 None 4.52 (1.97)** 2.58 (0.96)***
5 5 Partial 10 None 5.17 (1.71)*** 2.89 (0.84)***
6 5 Full 10 None 5.02 (1.25)*** 2.48 (0.61)***
7 10 Partial 5 None 4.79 (1.60)*** 2.54 (0.79)***
8 10 Full 5 None 4.72 (1.61)*** 2.38 (0.79)***
Overall CV contrast—5 vs. 10(%) 1.47 (0.29)***
Notes: Linear growth model contrasts, compound symmetric covariance structure.

Overall contrast compares all eight scenarios, isolating effect of CV.
groups in terms of profit (per win and per bid). Results Figure 8 Average Profit by Scenario
similar to our preliminary findings are obtained6;
those participants with more precise cost estimate dis-
% Profit per Round
tributions generate more profit. This appears as posi-

tive contrasts for scenarios 4–6 and negative contrasts
for scenarios 7–8 (where the more precise estimates
are for group B). We also test it explicitly with an over-
10% v. 10%
10% v. 5%
5% v. 10%
all CV contrast using all eight scenarios. Bidders with

more precise distributions (CV = 5%) earn signifi-
cantly more (1.47% more per bid, p = 0.000). These
results support our first hypothesis (H1).
More interestingly, we observe differences in how 1 4 + 2 5 7 3 6 8
Scenario
the availability of competitor information affects

profit. To anchor the discussion, we first look at the none v. none paral v. none full v. none
results in aggregate—would a buyer in a procurement
auction prefer one scenario to another? Figure 8 shows Notes: Reported scenario averages are for both bidder groups; this
the average % profit per round for our treatment sce- represents the average project profit. Scenarios are clustered by
understanding level; column shading indicates precision compari-
narios. This equates to how much over cost, on aver-
son. One of the scenarios of interest (+) is the same as scenario 4,
age, a buyer will spend in each information condition.
so we include that data twice.
Providing one bidder information clearly drives down
the procurement price. Simple t-tests show profit
under no market understanding to be significantly aggregate. This finding appears to run counter to our
higher than either our partial info asymmetry predictions (H2 and H3) that increased market under-
(p = 0.047) or full info asymmetry (p = 0.027). There is standing improves bidder profit. Campbell and Levin
no statistical difference between partial and full, in (2000) highlight that the conventional notion of an
Figure 9 Impact of Information on Profit

Same CVs Advantaged CV has Info Disadvantaged CV has Info
6 6 6
5 5 5
% Profit per Win
4 4 4
3 10% 3 5% 3 5%
2 10% 2 2
1 1 1
0 0 0
-1 -1 -1
10% 10%
-2 -2 -2
none paral full none paral full none paral full
Notes: Solid lines represent the bidder with info (where applicable); dashed line represents no info. One of the sessions (“none” in panels
2 and 3) is shown twice since it represents the same scenario.
informed bidder leading to higher bidder profit is not Table 3 Analysis of Profit
a general principle—at least for auctions in which the
3-1 3-2
information of the advantaged bidder is unambigu- Dependent variable % Profit per bid % Profit per bid
ously superior. Here, our results show another setting Explanatory variables Treatments Opponent’s treatments
where departure from the established result may hold. Constant 0.012 (0.301) 1.815 (0.440)***
While we see on overall reduction in profit for ses- Treatments
sions when market information is provided to a bid- High precision (5% CV) 1.790 (0.330)*** 1.079 (0.353)***
der, that could be driven by our different bidder Partial information 0.268 (0.410) 0.820 (0.486)*
types. Figure 9 breaks out each session’s results into Full information 0.198 (0.381) 1.288 (0.465)***
Control variables
bidder-specific returns. In the right panels, it is again Bid round 0.037 (0.019)* 0.036 (0.019)*
easy to see the large impact of cost estimation preci- Opponent w 5% CV 1.466 (0.351)***
sion—those bidders with a coefficient of variation of Opponent w partial info 1.502 (0.485)***
5% earn markedly higher profits (mirroring the results Opponent w full info 1.472 (0.463)***
from Table 2). In those same panels, the presence of Bidder random effects Yes Yes
Wald Chi-squared 33.5 72.5
information reduces the profitability of both bidders, Mean response 1.0 1.0
although not uniformly. It appears that the effect dif- Observations 3676 3676
fers depending on whether you have the info or are DF 4 7
bidding against it. For example, if a bidder has a better
Notes: Linear regression with random effects. Standard deviations in
estimate and more info (see middle panel), then parentheses.
understanding their own distribution (partial) keeps Significance levels: * < 0.10, ** < 0.05, *** < 0.01.
their profit high while eliminating a competitor’s prof-
itability; however, knowing both distributions (full) dependent variable (similar results are obtained with
reduces profit for both. Two takeaways: 1) if a bidder % profit per win).
is going to gather info, it is clear they want their own Our baseline model (3-1) highlights the outsized
bidding precision but 2) it is not clear whether they effect of a more precise estimate (1.790, p = 0.000), as
should want info beyond that (about the competition). well as a modest effect of learning with each round
Our previous analysis did not account for all of these (0.037, p = 0.056), before considering who the bidder
scenarios (which appear to matter) explicitly. is bidding against. Model 3-2 incorporates the oppo-
We turn to linear regression to analyze our treat- nent’s treatment. Now, an advantage in either preci-
ment conditions given the range of scenarios that sion or info by an opponent induces a large and
impact outcomes. Because our experiment involves significant reduction in profit; while the benefits to
individuals bidding over multiple rounds in the same having an advantage yourself are positive for preci-
session, we attempt to account for differences in our sion (1.079, p = 0.002) but negative for understanding.
individuals using a linear regression with random Since bids in our experiment are head-to-head, these
effects.7 We include our treatment effects: the preci- coefficients reveal the spread between two bidders.
sion level (10% or 5% CV) and understanding level For example, if a bidder were to have info on their
(none, partial, or full). We also include controls for own distribution (partial), then their own profitability
the bidding situation: the bidding round and the per bid might decrease some ( 0.821%, p = 0.085) but
opponent’s treatment. Table 3 shows the results of not nearly as much as their opponent’s would
this analysis, with profit (as a % per bid) as the ( 1.502%). Contrast that with the full information
case, in which one’s own profitability would fall to be a de facto goal. Using a Wilcoxon rank sum test
1.288% per bid (p = 0.005)—almost as much as the to compare average markups from individuals, we do
opposing bidder’s ( 1.472%). These findings do not not see much difference between scenario groups.
support hypotheses 2 and 3, which predicted that However, there are some fairly clear patterns observ-
information would improve performance. There is able within the data. For instance, after winning a bid
one interpretation that projects some rationality on and losing money (winner’s curse), subsequent bids
these results. Even if information about the estimates increase (as bidders submit less aggressive bids). Fig-
is bad for bidders, it is worse for their opponents, often ure 10 shows these data split by whether the bidder
driving the latter to negative average profitability. won or lost the previous round (and the type of win
With increased visibility into the auction mechanisms, or loss). At this summary level, we are not accounting
it is possible that bidders with more information are for all of the differences between sessions and situa-
making less profit yet making it impossible for a com- tions (or even individual bidder characteristics), but
petitor to survive. Admittedly, we envisioned perfor- the aggregate message is that there may be some
mance as profit in developing our hypotheses, but the interesting behaviors here. For example, bidders who
results open the question as to whether profitability win and make money increase their markup percent-
spread (considering your opponent) would be a better age in the next round (in aggregate), bidders who win
metric. It would be interesting to investigate this and lose money increase their bids by even more, and
tradeoff in a setting designed to purposefully control losing bidders decrease their markups (bid more
for that possibility. We leave this to future work. aggressively). These behaviors are predicted by learn-
ing direction theory, which states that future deci-
4.2.. Bidder Behavior sions are based on “ex-post rationality,” where
Having explored the results of the auction, we pivot bidders directionally adjust their next bid based on
and examine the bidding behavior leading up to those what might have been better the last time (Selten et al.
results. First, we examine how individuals modify 2005). There also appears to be a more muted
their strategies subject to various bidding situations. response from those with information, possibly indi-
Second, we delve into differences in bidder strategies cating more stable bidding behaviors due to the addi-
under our three market understanding conditions tional market information they possess. We turn to
(none, partial, and full). Our prediction (H4) is that regression analysis to test for these behaviors in light
bidders with less precise cost estimates will bid more of the various bidding scenarios.
aggressively as their knowledge of the market Because our experiment involves individuals bid-
increases. These lines of inquiry take advantage of the ding over multiple rounds in the same session, we
laboratory setting and the detailed round-by-round attempt to account for differences in individuals
data we have on the bidders and seek to identify pos- using a linear model with random effects (as before)
sible explanations for the results seen here. and our treatment effects: the precision level (10% or
Table 4 summarizes the empirical performance 5% CV) and understanding level (none, partial, or
within each scenario, including average win %, aver- full). We also include controls for the bidding situa-
age winner’s curse % (given as the percent of wins tion: the bidding round and most recent result. The
that lost money), and average markup % (relative to idea behind using most recent result is the same as in
the cost estimate). First, we find that the winner’s Figure 10; capturing the most recent feedback
curse is alive and well; bidders adopt aggressive gleaned from the auction is likely to impact a bidder’s
strategies such that winning the auction round seems next action. We divide the situation possibilities into
Table 4 Summary of Experiment Markup Behavior
Group A Group B
Scenario # Auctions CVA InfoA Win % W Curse % % Markup % Markup W Curse % CVB InfoB
1 140 10 None 54 37 10.5 (9.5) 10.9 (7.9) 23 10 None
2 240 10 Partial 51 41 8.7 (11.0) 8.7 (13.5) 52 10 None
3 240 10 Full 55 39 9.3 (6.3)* 12.5 (11.8) 46 10 None
4 160 5 None 57 21 8.1 (7.7) 10.5 (10.5) 42 10 None
5 198 5 Partial 55 12 8.3 (7.7) 9.8 (7.4) 49 10 None
6 380 5 Full 49 25 6.2 (5.8) 7.1 (9.6) 56 10 None
7 240 10 Partial 47 49 9.2 (7.2)* 6.5 (6.0) 29 5 None
8 240 10 Full 53 57 7.7 (11.8) 8.2 (7.7) 30 5 None
Notes: Wilcoxon rank sum test shown comparing average participant % Markup from group A vs. B.
Standard deviations in parentheses.
Figure 10 Impact of Information on Next Markup—All scenarios our experiment treatments plus bidding round and
6 bidder effects. Model 5-1 shows the results. The nega-
tive coefficient on being in the high-precision condi-
tion ( 1.748, p = 0.017) makes perfect sense—bidders
4
Percentage Point Change
who get a more accurate estimate do not need to build

as much cushion into their bids. In our experiments,
in Next Markup
2 this lower markup ( 1.7%) is more than made up for

by the increased accuracy of the estimation (the coeffi-
cient of variation for the bid estimate being reduced
0
Paral
None
Full
from 10% to 5%) and shows up in the prior section’s

higher profits (Table 3) despite the lower markup. We
-2 also see an effect as the experiments progress. For
each additional round, bidders submit less aggressive
-4 bids (0.120, p = 0.000)—meaning bid markups in the
Won bid, Won bid, Lost bid, Lost bid, final round average 2.4% higher than in the first
+ Profit – Profit + Markup – Markup round.
(n= 1,048) (n= 660) (n= 1,716) (n= 66)
To ensure that strategic corrections from the prior
round are not biasing the results, controls that capture
Notes: For lost bids, comparison is to bidder’s estimated cost, the bidding situation are incorporated. Model 5-2
since profit data are only available to winners. Win and loss totals introduces our simple designations regarding the
uneven due to unanchored bidder partners generally losing in
type of win or loss. These situation controls do not
wiped out rounds.
change the narrative; the previous coefficients keep
their same sign and significance. However, strategies
four options: a prior winner who made money (Profit of the bidders emerge. Winning profit makers have
maker), a prior winner who lost money (Winner’s higher markups (1.045, p = 0.001) in the next round,
curse), a prior loser who bid below their given esti- while those suffering the winner’s curse mark up even
mate (Markdown loser—a rare event), and the base case higher (1.263, p = 0.001). Despite a small sample size,
(Markup loser) that represents losing with a bid at least it is interesting to note what happens in the event that
as high as your estimated cost. The results are bidders lose while bidding below their estimate. These
reported by way of three models (Table 5). markdown losers continue to mark up below average
We start by estimating our baseline model, predict- the next round ( 5.424, p = 0.000). This evidence sug-
ing a bidder’s markup (as a percentage) using only gests that either the learning that occurs after losing
Table 5 Analysis of Markup Behavior
5-1 5-2 5-3

Dependent variable Markup % Markup % Markup %
Explanatory variables Treatments Bidding situation Differences over time
Constant 8.135 0.545*** 7.954 (0.457)*** 8.284 (0.500)***
Treatments
High precision (5% CV) 1.748 0.733** 1.864 (0.554)*** 1.839 (0.556)***
Partial information 0.056 0.910 0.175 (0.686) 1.716 (0.941)*
Full information 1.118 0.849 1.235 (0.639)* 1.507 (0.871)*
Control Variables
Bid round 0.120 (0.023)*** 0.106 (0.023)*** 0.073 (0.030)**
Profit maker 1.045 (0.319)*** 1.051 (0.319)***
Winner’s curse 1.263 (0.376)*** 1.285 (0.376)***
Markdown loser 5.424 (1.074)*** 5.418 (1.073)***
Interactions w Bid round
Bid round 9 Partial info 0.150 (0.063)**
Bid round 9 Full info 0.026 (0.056)
Bidder random effects Yes Yes Yes
Wald Chi-squared 36.0 91.6 97.4
Mean response 8.6 8.6 8.6
Observations 3676 3676 3676
DF 4 7 9
Notes: Linear regression with random effects.

Standard deviations in parentheses.
with an unrealistically low bid is not the same as if understanding does not help in the low-precision
you had won (and suffered a loss) or that there is setting and why partial understanding bidders get
some bidder tendency being captured by the situa- better in the high-precision setting (or, framed alter-
tion. Either way, one possible explanation—suggested nately, why full understanding bidders fail to capi-
by Holt and Sherman (1994)—is that, due to a utility talize). There are two mechanisms from the literature
derived from winning, bidders are motivated to chase that can explain these. (1) Bereby-Meyer and Gross-
a win instead of bidding rationally. kopf (2008) show that bidding environments in
We also allow for interaction effects to tease apart which choices and outcomes are only partially corre-
any differences that our treatments may have over lated can lead to ambiguous feedback and propagate
time. Model 5-3 incorporates these interaction effects the winner’s curse. That explanation might account
with similar results—except now it is apparent that for why understanding in our 10% CV case does not
bidders with partial info increase their markups over also lead to an advantage; the wide variability in cost
time. While partial and full info bidders both bid estimate may be too ambiguous to learn enough. (2)
more aggressively than no info bidders initially, the There is evidence of bidders using mental shortcuts
positive, significant coefficient on the partial under- to process information in auctions. Bidders simplify
standing interaction (0.150, p = 0.017) highlights that their decisions by ignoring certain components or
bidders who know their own distribution raise their making reductive assumptions in negotiation set-
markups more than other bidders—over 3% more by tings (Ball et al. 1991). This looks a lot like informa-
the conclusion of the experiment. tion overload, which also could explain why our full
It might be that partial info helps bidders learn to understanding bidders fail to avoid the winner’s
avoid the winner’s curse more effectively. A simple curse—the cognitive demands of dealing with more
visualization helps explore this possibility (Fig- information may be too onerous.
ure 11). While it is not unexpected that bidders in From the above, it does not appear that disadvan-
the partial information case avoid losses better than taged bidders are more aggressive with their bids
those with no information (left panel), it is striking when they have more market knowledge, and there-
that they so thoroughly outperform those with full fore, our last hypothesis (H4) is not supported. A for-
information. The panel on the right breaks up the mal test of all markups (similar to model 5-2 but
overall result by precision, uncovering the source of accounting for opponent precision) confirms that con-
that difference. It turns out bidders with partial clusion. We do observe an unexpected benefit of
understanding do avoid losses better—but only in limited information (partial understanding) in our
our more precise 5% CV treatment. In order to high-precision case, where having knowledge about
explain this, we need to know why market the partial state of the cost estimate landscape (your
Figure 11 % of Winning Bids that Lose Money (Winner’s Curse) by Understanding
A l l B i dde r s S p li t b y P r e c i s i o n ( C V )
50% 70%
45% 60%
Winner’s curse %
50%
40% None None
10% CV
Full
40% Paral
Full
35%
Paral 30% None
30%
5% CV
Full
20%
25% Paral
10%
20% 0%
1-5 6-10 11-15 16-20 1-5 6-10 11-15 16-20
Bidding rounds Bidding rounds

own estimate distribution) actually increases the Figure 12 Behavioral Mechanism on Markup (Effect of Information)
number of monetary losses avoided. Next, we run an
additional experiment to tease apart what mechanism Paral
contributes to this outcome. None n.s.
Ignore
Markup %
4.3. The Effect of Ignoring Information
Having observed interesting behavior in one bidder *
segment (those with more accurate cost estimates and
only information about their own estimate’s distribu- Full
tion), we design a second experiment to explore the
mechanism at play. In order to test information over-
load in asymmetric common value auctions, we care-
fully manipulate conditions in the setting with full
information and 5% CV (scenario 6, group A) to see 5% CV Overload migaon
(vs. None 10% CV) treatment
why full information bidders do not succeed as often
as partial information bidders. Notes: Overload mitigation treatment based on Full 5% CV (vs.
We put 24 more subjects through this treatment. None 10% CV) case; scenario 6. Differences in markup tested via
The experimental setup is the same as before (with our random effects model (as before). Expectation for mitigation
identical instructions, protocols, payouts, and admin- treatment was a positive shift from Full, so one-tailed test is
reported. Significance levels: < 0.10, < 0.05, < 0.01.
istrators as Section 3) except with specific additions to
introduce the mechanism. Half the subjects play the
role of the advantaged bidder (with full information Telling a bidder to ignore a competitor’s informa-
and 5% CV) and half are in the control treatment tion entirely erases the difference between full and
(with no information and 10% CV). partial information. Parkes et al. (1998) stress that the
To explore information overload and whether the most important user cost in online auctions (in the
availability of information was potentially influencing independent private value setting) is the cognitive
behavior, subjects are instructed to ignore the infor- cost of deciding valuations, which can be computa-
mation about their competitors. The only difference tionally complex. Our results mirror this for common
from the original case (scenario 6, see Table 1) is the value auctions, and show that when advantaged bid-
inclusion of one extra line in the instructions for the ders get additional information about their competi-
advantaged bidders: “However, your company has tor’s bid estimate variance, they bid more
determined from evaluating past project bids that you aggressively and, as a result, experience the winner’s
should ignore the information about your competi- curse at rates almost double to what they would
tor’s accuracy and just focus on your own info.” otherwise. This raises questions about the use of com-
If information overload is a factor in the previously plete information cases that is the standard in auction
observed performance decline, then helping subjects research. Our experiments suggest that there are hid-
reduce the information that needs attention should den costs of too much information.
mitigate some of the challenges. Figure 12 summa-
rizes the results for advantaged bidders (5% CV). The
left column shows the average markup % from the
5. Conclusion
original laboratory sessions. The right column shows In summary, we observe benefits of more precise cost
average markup % from the overload mitigation treat- estimates (H1). Bidders with better estimates make
ment. Advantaged bidders behave differently than more profit and avoid the winner’s curse more often
before. Running a linear model with random effects (while marking up their estimates less). We find
(as before) with markup (as a percentage) of the mixed support for the benefits of understanding cost
advantaged bidders as the DV and treatment and estimate distributions, both their own (H2) and their
round as effects, we observe significant deviations. competitors’ (H3). Profits fell in both cases we tested
The full information subjects in the overload mitiga- (directly opposite our claim), but there is some evi-
tion treatment results in markups that are 1.8 points dence that increased understanding allows bidders to
higher (p = 0.074) than the full information bench- control the bidding environment, ratchet up the pres-
mark and indistinguishable from the partial informa- sure on competitors, and make opposing bidders
tion case ( 0.866, p = 0.543). The addition of one line unprofitable (while seeing a limited decrease in their
instructing participants to ignore the competitor own profitability). This strategic decision suggests
information has a remarkable effect on markups, that profit spread may be an interesting lens to apply
canceling the negative impact from the full under- to procurement auction research. Finally, our hypoth-
standing treatment. esis on bidder behavior predicted that disadvantaged
bidders would be more aggressive as their under- etc. The upshot is that even our full understanding
standing of their disadvantage increased (H4). This case gives bidders much less information than other
claim is not supported. We do see less profit for those experiments normally dole out. We conjecture that
bidders—but not because of their own markup. We being able to focus on just two pieces of information
end up not seeing more aggressive bids from our dis- (a cost estimate and its precision) allowed our partial
advantaged, market knowledgeable bidders. understanding bidders to fully exploit that informa-
In the course of investigating these cases, we also tion when possible (in the high-precision case)—and
uncover an interesting behavioral result. We find that additional information worked against them. We
understanding the precision of your own cost esti- also anticipate that the benefits of limited information
mate to be beneficial in avoiding the winner’s curse in can be explicitly explored in future studies and yield
the higher-precision treatment. Prior research has interesting insight.
noted the difficulty in studying the winner’s curse In terms of limitations, there is a scarcity of work in
phenomenon and finds that more information, more common value auctions that deliver testable, normative
time, or more experience does not help alleviate losses models. Thus, we rely heavily on our set of designed
(Bereby-Meyer and Grosskopf 2008, Dyer and Kagel experiments to help explore and uncover new knowl-
1996, Foreman and Murnighan 1996, Kagel and Levin edge in the domain. This is one of the first papers to
2002). Here, we provide an example where informa- heed the call for experiments in more realistic settings
tion helps, though not uniformly—the same result (e.g., Aloysius et al. 2016, Dyer and Kagel 1996), and
does not apply if bidders know both their own preci- that is both a strength and a limitation. Our parameters
sion and the precision of others. We explore a mecha- and setup make our experiment look very similar to
nism that could explain this finding—information DOT procurement auctions, but additional work is
overload. needed to extend these insights to other fields, types of
This result highlights that giving a bidder informa- information, and settings in general. For example,
tion about the competition has the potential to lower future research might look at actual cost advantages (a
their profit levels. This does not mean that the fully shift asymmetry, as opposed to precision advantages)
informed bidder does worse than the uninformed in a similarly realistic setting to help assess the impact
bidder; instead, they do worse than they might have of information. We also observe different types of bid-
with less information. At the auction level, when ding strategies in the data that would be interesting to
there is a bidder with lots of info, that can be good for analyze and may yield further insights into the behav-
the auction buyer, since we have seen the bidders ioral workings of procurement auctions.
may not profit as much. Figure 8 highlights this bene- Practically, we have two recommendations. First, for
fit of information for the buyer, with more aggregate procurement auction buyers, having a well-informed
information in the auction leading to lower profits by and a precision-advantaged bidder in the auction (not
the bidders and cheaper contracts for the buyer. necessarily as one entity) appears to drive the procure-
Finding that information impacts bidding behavior ment cost down (Figures 8 and 9). Helping some
in this way is unique but has some interesting paral- participants understand their bids and results may
lels in the literature. Prior work also stresses the influ- encourage this dynamic. Notably, these cheaper
ence of revealed information in the auction acquisitions depend on also having bidders with
environment as pertaining to bidders holding both poor estimating precision in the market. If a precise
private and public information (Grosskopf et al. 2018) bidder was to drive all imprecise bidders from the
and post-auction information revelation (Kagel and market, then the procurement price might balloon,
Levin 1999). Our result adds more evidence that full, so buyers in markets with low entry costs (and
transparent information may result in detrimental abundant new entrants) may derive more benefit
bidding behavior. from this. Second, for procurement auction bidders,
The above finding is notable because of the way we focusing on your own information—to the exclusion
setup our experiment. In all parts, we emphasize real- of competitor and market info—appears to be better
ism. Whereas previous studies have focused on tract- than having lots of information. This suggests that
able formulations to develop insight, we flip that bidders, once they understand their own precision,
around and ask whether those insights still apply in can be relatively successful with very little addi-
real-life scenarios. Accordingly, we define our auction tional time or research.
asymmetries in terms of cost estimate precision and
understanding about that asymmetry by the bidders.
Each part of the experimental design was chosen to
Acknowledgment
more closely mimic reality: normal distributions The Darla Moore School of Business Internal Research Grant
instead of uniform, more pre-auction uncertainty Program at the University of South Carolina provided finan-
instead of transparency, less post-auction feedback, cial support for this research.
1695Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society
Understanding: None
Results (for loser and winner)

Appendix A: Sample Screen Shots from Experiment
Precision: any
Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society
Understanding: Full
Understanding: Partial
Precision: 5% (vs. 10% for competitor)

Precision: 10%
1696
1697Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society
Understanding: None
Appendix B: Sample Participant Instructions
Precision: 10%
Production and Operations Management 29(7), pp. 1679–1701, © 2020 Production and Operations Management Society
Understanding: Partial
Precision: 10%
1698
Appendix C: Consistency Check on Initial Markups
In these auction experiments, bidders have less information about the bidding landscape than in some other lab-
oratory experiments (see Sections 1 and 3.1). Given that some participants are not aware of the information that
their competitors possess, their learning is the result of experience in the auctions over the course of the 25
rounds. If that is the case and participants show up with similar prior beliefs, we should be able to see similar
bidding behavior in some of those early rounds for certain treatments.
Specifically, we highlight the partial and none information cases to test whether comparable bidders have simi-
lar assumptions a priori and thus make similar bids initially.
One challenge with this is that there is evidence that bidders use the five practice rounds to experiment and
learn, as intended. Looking across all treatments, the standard deviation of bids in the first five rounds is higher
than the bidding rounds. We look at the first three practice bids and the first single real bid to try and detect how
bidders approach markups initially.
Avg. markup SD
Practice rounds 6.61% (17.79)
Bidding rounds 8.18% (11.42)
Our first consistency check is conducted with the partial information bidders. These are bidders that know
their own precision (CV = 10% or 5%) but know nothing about their competitor. The table below shows how
these markups compare. The first two columns show the type A bidders in scenarios 2 and 7, which have partial
info and CVs of 10%. Looking at the first three practice rounds as well as the first round of real bidding high-
lights markups that are similar; the differences are not statistically significant. Adding in the type A bidders from
Table C1 Average Markup in Initial Rounds for Partial Information Settings
Markup p-value Markup p-value

Scenario 2A 7A 5A
Bidder info 10P 10P 5P
Opponent info 10N 5N 10N
First three practice rounds 6.41 5.51 (0.779) 7.31 (0.604)
First bidding round 5.25 6.73 (0.529) 9.64 (0.048)*
scenario 5 (right column) who have CVs of 5%, we see a difference in their first round of real bidding, with mark-
ups that are significantly higher than the other two cases. This matches what we would hope to see, with differ-
ent revealed CVs resulting in different early bidding and matching revealed CVs resulting in similar early
bidding.
Our second consistency check is conducted on the bidders in the none information case. These are bidders that do
not know anything about either precision and simply get a cost estimate. There are 10 cases of such bidders in our
experiment design, bidding against all types of opponents. Again, we look at the markups in the first three practice
rounds (avg: 8.07) and the first bidding round (avg: 8.33) across all scenarios and run an ANOVA test to check for
differences in the markups. We find that the markups are not statistically significant for either the first three prac-
tice rounds (p = 0.561) or the first bidding round (p = 0.308). This, again, matches what we would hope to see.
Notes levels, with Subject nested within Group nested within

Scenario. Nearly identical results obtained if the covari-
1
If bidders were heterogeneous in their capabilities (e.g., dif- ance structure is instead modeled as a heterogeneous first
fering in their cost of materials), then the normality observed order autoregressive structure, ARH(1).
7
could be from variation in other characteristics—as opposed Using random effects for the bidders means instead of
to their estimation function. We analyzed the DOT data a each bidder getting their own personal coefficient or effect
number of different ways (i.e., by experience, number of via a fixed effect, we treat the bidders as draws from a lar-
bids, etc.) to account for such possibilities. For example, ger potential population and estimate how spread out the
looking only at very experienced companies (with more than group might be via a single variance parameter. (We also
50 bids), we see almost identical patterns, so the variation in test different covariance structures using a repeated mea-
bids observed is likely not from such other characteristics. sured mixed model and get similar results—simple ran-
2
One session (scenario 5) ran only 18 rounds, because one dom effects model presented for simplicity.)
bidder lost money every round and exhausted their cash
balance. Subsequently, we put in additional controls to References
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Vol. 29, No. 7, July 2020, pp. 1679–1701 DOI 10.1111/poms.

To Thine Own Self Be True: Asymmetric Information

Bidders in procurement auctions estimate their cost

Symmetric Uniform Symmetric Normal Asymmetric Uniform Asymmetric Normal

$700,000 and appear fairly uniform in their distribu-

Figure 5 Illustration of the Structure of Each Round

Figure 6 Sample Information Disclosures by Level of Understanding

Table 1 Summary of the Observed Experiment Outcomes

Scenario # Auctions CVA InfoA Win % % Profit/win % Profit/win CVB InfoB

Table 2 Bidder Profit

Notes: Linear growth model contrasts, compound symmetric covariance structure.

tributions generate more profit. This appears as posi-

all CV contrast using all eight scenarios. Bidders with

the availability of competitor information affects

Figure 9 Impact of Information on Profit

Table 4 Summary of Experiment Markup Behavior

who get a more accurate estimate do not need to build

2 this lower markup ( 1.7%) is more than made up for

from 10% to 5%) and shows up in the prior section’s

Table 5 Analysis of Markup Behavior

5-1 5-2 5-3

Notes: Linear regression with random effects.

Figure 11 % of Winning Bids that Lose Money (Winner’s Curse) by Understanding

Bidding rounds Bidding rounds

Results (for loser and winner)

Precision: 5% (vs. 10% for competitor)

Appendix B: Sample Participant Instructions

Appendix C: Consistency Check on Initial Markups

Table C1 Average Markup in Initial Rounds for Partial Information Settings

Markup p-value Markup p-value

Notes levels, with Subject nested within Group nested within

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