Verifiable Offers and the Relationship between Auctions and Multilateral Negotiations

We use the experimental method to compare second-price auctions with 'verifiable' multilateral negotiations in which the sole buyer can credibly reveal to sellers the best price offer he currently holds. Despite the two institutions' seeming equivalence, we find that prices are lower in verifiable multilateral negotiations than in second-price auctions. The difference occurs because low-cost sellers in negotiations often submit initial offers below the second-lowest cost. We also compare the two institutions to previously studied first-price auctions and multilateral negotiations with non-verifiable offers. Second-price auctions yield the highest prices, followed in order by verifiable negotiations, non-verifiable negotiations and first-price auctions. Copyright 2005 Royal Economic Society.

[1]  R. McAfee,et al.  Auctions and Bidding , 1986 .

[2]  Paul R. Milgrom,et al.  A theory of auctions and competitive bidding , 1982 .

[3]  R. McAfee,et al.  Analyzing the Airwaves Auction , 1996 .

[4]  Bart J. Wilson,et al.  A Comparison of Auctions and Multilateral Negotiations , 2002 .

[5]  J. Newhouse,et al.  Policy watch: Medicare. , 1996, The journal of economic perspectives : a journal of the American Economic Association.

[6]  Keith Waehrer,et al.  The Effects of Mergers in Open Auction Markets , 2001 .

[7]  V. Smith,et al.  Research in Experimental Economics , 1979 .

[8]  Vernon L. Smith,et al.  A test that discriminates between two models of the Dutch-first auction non-isomorphism , 1983 .

[9]  V. Smith,et al.  INCENTIVES AND BEHAVIOR IN ENGLISH, DUTCH AND SEALED‐BID AUCTIONS , 1980 .

[10]  Ronald M. Harstad,et al.  Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study , 1987 .

[11]  Catherine Wolfram.  Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales , 1998 .

[12]  E. Chamberlin,et al.  An Experimental Imperfect Market , 1948, Journal of Political Economy.

[13]  V. Smith.  An Experimental Study of Competitive Market Behavior , 1962, Journal of Political Economy.

[14]  T. Cason.  An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction , 1995 .

[15]  V. Smith,et al.  Papers in Experimental Economics: Theory and Behavior of Single Object Auctions , 1982 .

[16]  Vernon L. Smith,et al.  Method in Experiment: Rhetoric and Reality , 2002 .