Better, Faster, Cheaper: An Experimental Analysis of a Multiattribute Reverse Auction

Mechanism with Restricted Information Feedback

Author(s): Ching-Hua Chen-Ritzo, Terry P. Harrison, Anthony M. Kwasnica, Douglas J.
Thomas
Source: Management Science, Vol. 51, No. 12 (Dec., 2005), pp. 1753-1762
Published by: INFORMS
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MANAGEMENT
SCIENCE
int!?
Vol.

51, No.

12, December

2005,

pp.

1753-1762

DOI i0.l287/mnsc.l050.0433

ISSN0025-19091 EissN 1526-55011051511211753 ? 2005 INFORMS

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

Information

Terry P. Harrison,
J. Thomas
Douglas

Chen-Ritzo,
Ching-Hua
M.
Kwasnica,
Anthony

Smeal

of Business,

College

The

(chenritzo@psu.edu,

Feedback

State University,
Park, Pennsylvania
University
Pennsylvania
tharrison@psu.edu,
kwasnica@psu.edu,
dthomas@psu.edu}

use
a
auctions
of reverse
for procurement
majority
single-attribute
on
straints
attributes
and
lead time. Alternatively,
such as quality
The
nonprice
a multiattribute
can
a
auction
both
and
where
bidders
levels
price
specify

an auction may provide higher

will

be

realized

increased

for a buyer whose

mechanism
supply

the

given

theoretical utility

chain

procurement

utility

problem

to price. The auction mechanism

We

function.
a

price-only

words:

1.

we

setting,

provides

was

with

In this

auction.

the

is known
consider

the bidders with

economics;

experimental

by Sunil Chopra,
the

authors

3 months

operations

while
could

of nonprice

and

we

research,

con
providing
to conduct
choose

attributes.

While

lead

restricted

present

an

such

improvement
auction

ascending

on three attributes. Motivated

and dependent

quality

format
buyer

it is not clear that this theoretical

the performance
of this multiattribute
experimentally,
with
mechanism.
the price-only
auction,
Compared

auctions;

History: Accepted
paper

function

in increasing both buyer utility and bidder

effective
Key

explore,
auction

of

complexity

to the buyer,

(price)
a

16802

time

for

feedback
find

two

attributes

regarding

auction
we

the

mechanism
that

the buyer's
as

our mechanism

by a

in addition

utility

compared
design

to
is

(supplier) profits.

supply

chain

management

and supply chain management;

received January 2004. This

for 2 revisions.

Introduction

are auctions
in which
Reverse
auctions
the auction
on
behalf of a buyer, solicits bids from a group
eer,
a promising
of potential
sellers. They provide
alter
native to buying goods or services at a fixed price or
and can be easily implemented
through negotiation
General Electric
Covisint,
FreeMarkets,
electronically.
(Kwasnica and Thomas 2002), and Mars
(Hohner et al.
are
to
of firms that have attempted
2003)
examples
use auctions
are
an
auctions
for this purpose. While
excellent
form of price discovery,
there are usually
in addition
to price that can affect the
other aspects
value of the outcome.
In such cases, if the auction
on price only, the
focuses
process
competition
buyer
is forced to ignore these other aspects or to handle
them outside of the auction by subsequent
contractual
arrangements.

the buyer would

like to negotiate
all
Presumably,
contract
of the
with
all potential
dimensions
sellers
to discover
the most
valuable
it is
trade. However,
a multiattribute
not clear whether
auction mechanism
can be
that effectively
achieves
this, in the
designed
auction mecha
ory and in practice. A multiattribute
two characteristics:
nism should possess
the following
First, the buyer must be able to assess the value of a
a bidder must be able to
multiattribute
bid. Second,

bid on several attributes

These chal
simultaneously.
two
Is
the multiat
raise
lenges
important questions:
to the price-only
tribute auction superior
auction for
in theory? What
the buyer/seller
about in practice?
In this paper, we address
these questions
for a spe
cific multiattribute
auction mechanism
that provides
to the bidders.
restricted
information
feedback
A

number

of

researchers

have

considered

dimen

sions

in the procurement
other
than price
setting
from a purely theoretical perspective.
Che (1993) and
Branco
(1997) study the optimal
(buyer utility-maxi
auction when
there are only two attributes,
mizing)
In their models,
and quality.
bid
however,
price
can still be represented
der private
information
by
a one-dimensional
allows
type. This simplification
them to apply powerful mechanism
tools first
design
discussed
there
has
been
(1981). While
by Myerson
some recent promising
on multidimensional
work
mechanism
2000, Williams
1999),
design
(Armstrong
the extension
to
of one-dimensional
optimal auctions
is not straightforward.
dimensions
higher
Recently,
Parkes and Kalagnanam
(2002), Beil and Wein
(2003),
and Asker and Cantillon
(2004) have studied auctions
with
the potential
for many
attributes.
and
Parkes
for
look
efficient
(2002)
(total
Kalagnanam
surplus
auctions
when
there may
be many
maximizing)
1753

Chen-Ritzo

et al.: A Multiattribute

Beil and Wein

attributes and products.
(2003) focus on
a procurement
to
similar
ours, but examine
process
a mechanism
can learn the sup
the
which
by
buyer
are assumed
to
cost
when
functions
pliers'
suppliers
bid myopically.
the
Asker and Cantillon
(2004) study
the
auctions when
of multiattribute
in
is
linear
price.
scoring function
buyer's
even strong
theoretical
However,
may
properties
to justify the widespread
not be sufficient
applica
for
sealed-bid
tion of an auction. Vickrey
auctions,
are
in
their
used
practice
despite
example,
rarely
attractive
theoretical properties
(Rothkopf et al. 1990).
on the other hand,
is ubiqui
The English
auction,
have
shown
studies
tous.1 Numerous
experimental
even
in
human
auctions, actual
that,
simple price-only
properties

general

behavior may differ systematically

from what
theory
et al. 1980).2
predicts
(Kagel et al. 1987, Coppinger
a close parallel
Because
may
experiments
provide
with
the laboratory has
actual auction performance,
in
been successfully
used to testbed auction designs
(Banks et al. 1989, Brewer and Plott
settings
complex
et al. 2005).
1996, Kwasnica
to the
turned
For the reasons
above, we
given
laboratory to examine our multiattribute
experimental
an auc
was
to design
auction
Our
design.
goal
like the traditional
tion that, much
auction,
English
not only had good
but also
theoretical
properties,
because
both
well
Also,
performed
experimentally.
in
bidder
may matter
(seller) and buyer behavior
isolated
the overall performance
of the auction, we
of the auction with
the performance
respect to bid
and
this in mind, we developed
der behavior. With
values
three
that explicitly
tested an auction design
can sig
attributes?price,
quality, and lead time?and
on all three attributes
nal bidders
simultaneously.
with human
sub
Based on laboratory
experiments
to hav
In addition
jects, the results are promising.
our mechanism
theoretical performance,
ing desirable
leads to increased
buyer utility while maintaining
to a price-only
auction. We do
relative
seller profits
is opti
not claim, however,
that our auction design
a the
our contribution
mal. Rather,
is to propose
and
sound multiattribute
auction
design
oretically
the use of human-subjects
show its viability
through

of

this

1
Cramton

the

three characteristics
not fully reveal
the
we compare,
at both

following
First, we do
function. Second,
bidder
and individual
level, observed
in
behavior
the theoretically
expected
and a three-attribute
auction. Third,

highlight
research.

buyer's utility
the aggregate
behavior with
both a price-only

Auction Mechanism
Science
1754 Management

with Restricted
Information
51(12), pp. 1753-1762, ?2005

Feedback
INFORMS

our comparison
of the single-attribute
English auction
to the three-attribute
auction
is motivated
English
by
a
chain
procurement
specific supply
setting.
A differentiating
feature of our auction design
is
the type of information we provide
the bidders about
the buyer's
function.
the
Instead of revealing
utility
entire utility function, we only provide
infor
buyer's
on the marginal
mation
utilities
related to submitted
can be used to
bids. This information
guide bidders
toward their optimal bid. We made
this design choice
it may
for two reasons. First, in many
applications
not be practical
for a buyer to reveal their entire util
either for strategic
reasons, or because
ity function,
are
to
unable
it.
the informa
Second,
express
they
to the bidders
to be simple
tion provided
is designed
and intuitive. Previous
studies
of com
experimental
that simple
have demonstrated
infor
plex auctions
can often be effective
in generating
mation
efficient
et al. (2005) found that properly
Kwasnica
outcomes;
auc
in a combinatorial
prices
designed
single-item
in
tion can improve
the
fact
that,
efficiency
despite
not
these
do
all
the
necessary
prices
theory,
provide
It is possible
that the limited
informa
information.
tion we provide may
auction
per
actually
improve
the buyer's utility
formance
relative to fully revealing
the situation
function by simplifying
for the bidder.3
One of the objectives
of this research is to investigate
a reasonably
auc
whether
successful multiattribute
with
tion can be designed
information
that is both
for the buyer and simple for the bid
readily available
ders to understand.
one of the first to use experi
Bichler
(2000) was
ments

to study multiattribute
auctions. He examined
auctions
human
two-attribute
subjects experi
using
in general, have
ments
and found that the auctions,
It is pos
modest
auctions.
gains over single-attribute
of
the auc
sible that, due to the added
complexity
two
the
observed
with
attributes
tion,
gains
only
are considered.
may disappear when more attributes
in

Therefore,

our

experiments,

we

an

consider

auc

care about three

the buyer and bidders
attributes
and
lead
(i.e., price, quality,
time). In his
the
entire
Bichler
revealed
scoring func
experiments,
tion used by the buyer. Strecker
(2003) conducted
tion where

three-attribute

experiments.

We

Reverse

the pros and cons

(1998) discusses
rather than a sealed-bid
mechanism.

of using

an

English

auction
2
albeit somewhat
and Roth
See Kagel
outdated,
(1995) for a good,
on
literature
auctions.
review of the large experimental
simple

auction
where
experiments,
English
the buyer's
scoring function was not at all revealed
in the other. In
in one treatment
and fully revealed
a multiat
we
contrast to both these studies,
examine
tribute

auction

buyer's

scoring

that provides
function.

partial

revelation

3
if we published
For example,
the buyer's
utility
to arrive
to perform
calculations
ders would
need
attribute
bid levels. Assuming
the bidders
recognize
to do
correct

this,

it is still

calculations.

questionable

whether

of the

bid
function,
at the optimal
that they need

they would

make

the

Reverse Auction Mechanism

et al.: A Multiattribute
INFORMS 1755
Science 51(12), pp. 1753-1762, ?2005

Chen-Ritzo
Management

with

Restricted

Both Strecker (2003) and Bichler (2000) provided

util
the buyer's
tools for computing
bidders with
the issue of what
bids, whereas
ity for all possible
a three
to provide bidders within
kind of information
was
and
studied by Koppius
attribute auction setting
an
in
van Heck
(2003). They designed
experiment
information
subjects to different
they exposed
and an unre
restricted
architecture
architectures?a
In the restricted architecture, bid
stricted architecture.
ders were informed of the current best bid and bidder.
were
also pro
In the unrestricted
architecture,
they
recent losing bids.
vided with a ranking of the most
and van Heck
(2003) found that both the effi
Koppius
are greater in the unre
and
Pareto
optimality
ciency
case. Although
their
architecture
stricted information
two
effect
of
addressed
the
specific types
experiment
on the aggregate
outcomes
of information
exchange

which

auction,
they did not compare
auction case.
the
single-attribute
against
to
the bidders
the
information
Moreover,
presented
in both cases is actually very limited with
respect to
We
elabo
toward
their
bid.
optimal
guiding bidders
on
in
rate
this point
?3.1.
as follows:
In ?2, we
is organized
This paper
forms for buyer
the functional
describe and motivate
In
functions.
and
bidder
?3, we present
profit
utility
we
In ?4,
the exper
describe
the auctions examined.
are presented
in ?5. We con
imental design. Results
in ?6.
future directions
clude our work and discuss
of

the multiattribute
results

these

2.

The

ity and lead time.

The buyer's utility function for the contract
the value of
in price, with v(q, I) representing
attributes
q and lead time
nonprice
quality
the buyer's utility function for a
experiments,
is given by

4
We
the

=
q, I) v(q,

sourcing
auction when
suppliers

l)-p

+
aQOqb& aL0(l

is linear
the two
I. In our
contract

l**) -p,

(1)

to
related
be interesting
questions
at potentially
different
multiple
suppliers
multi
and Kalagnanam
levels. Bichler
(2005) consider
of the
auctions. We focus on the design
for multiattribute

recognize
incentive

attribute

> 0 and
are quality-related
constants
where
aQ0
bQ0
constants.
and aL0 > 0 and bL0 are lead-time-related
The buyer always prefers higher quality. In our exper
value of
iments, we chose bQ0 such that the marginal
<
<
is
(0 bQ0 1).
decreasing
quality
i for an
The profit function
for bidder
(supplier)
contract
is linear in price, with
awarded
c{(q, I) rep
i's cost as a function of quality and
resenting bidder
have
In our experiments,
bidders
lead-time
levels.
function:
cost functions
that yield the following
profit
=
ir,-(P, <7,1) V

cAq, 0

*Q,VQi Ml

lhu)>

(2)

> 0 and
are quality-related
constants
where
aQi
bQi
constants.
and aLi > 0 and bLi are lead-time-related
in
cost increases with
Each bidder's
improvements
cost of
and lead time. The marginal
both quality
>
is increasing
1). If the bidder
higher
quality
(bQi
she will have a profit of
the auction,
does not win
zero.

Define
between

the

a contract
created
total welfare
by
i at quality and lead
and bidder

the buyer

time levels (q, I)by

=
=
WK?, /) U{p, q, I)+ fli(p, q, 1) v(q, I) Ci(q, I). (3)
levels that max
Let (q*, I*) be quality and lead-time
that
the
Note
imize Equation
(3).
buyer can select at
most one supplier, and that total welfare
is unaffected
an
contract
the
efficient
procurement
price. Thus,
by
contract
is given by the supplier
(i) and the corre
total welfare.
(q*, I*) that maximize
sponding

Environment

a single indi
is procuring
is a single buyer who
visible object or contract from a set of three potential
attributes
suppliers.4 The contract has three measured
level q, and lead time Z.
of interest: price p, quality
as the amount
of
Lead time is typically
thought of
order and
time that the buyer must wait between
we use the subscripts
0
receipt of goods. Throughout,
and the sub
and i for the bidders
for the buyer
related to qual
scripts Q and L to denote parameters
There

U(p,

Feedback

Information

that

there may

to select

one
select at most
the buyer must
different
levels of attributes.

can offer

supplier

and

3.

The Auctions

two auction mechanisms.

Both auctions
We consider
reverse English
are generalizations
of the standard
to the multiattribute
auction
setting. The first is the
for bidding
that allows
multiattribute
(MA) auction
to
in all three attributes. We
this auction
compare
reservation
the price-only
(PO) auction where
qual
and bids
levels are predetermined
ity and lead-time
are only accepted on price. Only integer-valued
prices
are accepted,
and lead-time
and quality
offers are
1
to be integer values
between
ranging
required
and 10. The bidders were human
subjects, whereas
the buyer was
by the computer. Other
represented
are free to place any
bidders
than a time constraint,
bid at any time. Before the auction ends, the provi
or standing, bid is the one that max
sionally winning,
imizes the buyer's
utility among all the bids placed
it
since the start of the auction.5 Once a bid is placed,
cannot be cancelled.
For both the PO and MA auctions, a "soft" stopping
the
rule was used. That is, after an initial time period,

the
5

In the event

of

tie bids,

the bid placed

earliest

always

wins.

Chen-Ritzo

et al.: A Multiattribute

if no new standing
ended
bids were placed
for k seconds. The purpose
of extending
the auction
in this way was to eliminate
the advantage
that might
a bid
to bidders by sniping
be provided
(i.e., placing
in the last few seconds of the auction).6 In the PO auc
two minutes
and
tion, the initial time period was
/c= 45 seconds.
In the MA
the initial time
auction,
and k = 90 seconds.
period was five minutes
auction

3.1.

The Multiattribute
Auction
were
In the MA
to iden
bidders
auction,
required
were
not
multiattribute
that
bids
tify
only profitable,
but that would
also improve
the buyer's utility with
respect to the current standing bid. A critical element
of

the MA

bidders.

auction
we

Because

where
the buyer
with
certainty, we
the buyer's
utility

is the feedback
to the
provided
in mind
future applications
function may not be known
utility
have

opted against directly publishing

function.
Instead, after each bid,
about
the
information
simple
buyer's preferences was
to the bidder.
revealed
bid was
First, the standing
was
the
bidder
Second,
always displayed.
given three
related to the bid she placed:
pieces of information
the price difference
(PD), the marginal
(MQ),
quality
and the marginal
lead time (ML). The price differ
ence is the amount that the bidder must
lower her bid
a winning
in the price attribute
for it to become
bid
no
in quality
and lead-time
lev
(assuming
changes
are
and
time
lead
els). The marginal
quality
simply
the buyer's marginal
in q or Z
utility for improvements
at the bidder's most
recently placed bid. Importantly,
in our experiments,
the MQ value combined with
the
cost provided
bidder's marginal
her with
sufficient
to eventually
bid at q*. Similarly, ML and
information
cost information will direct the bidder
to /*.
marginal
Both the information
structures
studied by Koppius
and van Heck
have this fea
(2003) do not necessarily
ture. Under Koppius
and van Heck's
restricted
infor
mation
the bidder only receives
feedback
condition,
on the winning
to beat the
how
bid; this suggests
current bid but not how to find the optimal bid for
con
each particular
the unrestricted
bidder. Under
the bidder observes more
in the
information
dition,
form of the relative
of
bids.
the
However,
ranking
in supporting
the usefulness
of this information
opti
on
mal bidding
behavior
the actions of the
depends
other bidders.7 An advantage
of our information
feed
can
back is that the bidder
determine
independently
her unique optimal
It remains
attribute combination.
can be
to be seen whether
this information
properly
6

See Roth and Ockenfels

7
As an example,
imagine
identical
placed bids with

(2002)

for more

the extreme

on

the strategy

condition

where

of sniping.
all bidders

In that case,
attributes.
nonprice
no more
about potential
information
ing would
provide
ments
than a simple price-only
auction.

the rank
improve

Reverse Auction Mechanism

1756 Management
Science

with Restricted
Information
51(12), pp. 1753-1762, ?2005

Feedback
INFORMS

used by the bidders;

mental
examination.

our experi
that issue necessitates
Wfhile the above feedback
is pro
vided
for every bid submitted
in the MA
auction,
the auction,
throughout
only bids that beat the cur
rent best bid are accepted.
When

bidders

can determine

the optimal
quality
and lead-time
combinations
(q*,l*), it is straightfor
to show that it is a dominant
ward
strategy for them
to bid at those levels. Therefore,
consistent with
the
standard English
it is also a dominant
strat
auction,
the price offered until they
egy to continue
lowering
make zero profits. If all bidders
follow their dominant
strategy, the auction will be efficient and the expected
to the second
utility of the buyer will be equivalent
offer of the bidders.
See Chen-Ritzo
highest welfare
et al. (2005) for a formal discussion
of these properties
of the MA auction.
If the buyer had information
about bidder
costs,
then he may
find it in his interest to misrepresent
his
true utility
in the MA
function
auction. Che
(1993)
in a simpler multiattribute
shows that this is optimal
bidder
setting where
types are still one-dimensional.
Of

will
result in lost
any misrepresentation
not
We
did
examine
efficiency.
buyer misrepresenta
tion because our focus is on examining
bidder behav
ior in these auctions.
the
focus of this
Specifically,
on
an
can
is
whether
auction
be
that
paper
designed
to
sufficient
decision
allow
the
bid
provides
support
ders to bid as theory predicts
in a complex, multi
attribute
The
in our
bidders
setting.
human-subject
or
knew
that
the
func
experiment
utility
scoring
tion used by the auctioneer was programmed
by the
issues
of
Therefore,
experimenter.
buyer misrepresen
tation

course,

were

not

a concern.

3.2. The Price-Only

Auction
In the PO auction,
are simply
a state
all bids
ment
of a price at which
the bidder
to
is willing
the
Before
the auction begins,
the
supply
product.
reservation
levels for the nonprice
buyer announces
attributes. Let qr and V be the reservations
levels. All
as if they were
bids are then evaluated
placed with qr
and V in the other attributes.
Bidders were
expected
to identify the least cost quality and lead-time combi
nation satisfying
these reservation
levels to determine
their reservation
price.
the properties
cost functions,
Given
of the bidders'
never
bidders would
deliver
the product
voluntarily
at a quality or lead time better than the reserve levels.
Once the reserve levels are announced,
the PO auction
reverse English
is a standard
auction.
It is a domi
nant strategy for each bidder to bid down to the point
at the reserve
where,
levels, profits are zero, mean
end at the second-lowest
ing that the auction will
cost given
the reserve
levels. Because
the reserve
levels eliminate many
bid choices
for the bidders,

Chen-Ritzo
Management

Reverse Auction Mechanism

et al.: A Multiattribute
INFORMS 1757
Science 51(12), pp. 1753-1762, ?2005

with

Restricted

that buyer utility will always be

it is straightforward
at least as high in the MA auction as it is in the PO
et al. 2005).
auction
(Chen-Ritzo
the best chance of suc
To give
the PO auction
reserve
we
levels
for lead time and
the
chose
cess,
full
maximized
that
assuming
buyer utility
quality
it
While
bidder
functions.
of
the
profit
knowledge
have
to expect
that a buyer would
is unrealistic
when
full information
levels, we
setting the reserve
a difficult
test for
to provide
this standard
selected
It is worth
to compete.
the MA auction with which
to note that the reserve levels (for quality and
while
are not neces
lead time) that maximize
buyer utility
even though
efficient
the
levels.
Furthermore,
sarily
than
is no smaller
in the MA
auction
total welfare
the profit of the winning
in any PO auction,
welfare
bidder may be lower in the MA auction.

4. Design

of the Experiment

in our exper
treatments
four different
considered
bidders
iment: (1) The PO auction with
inexperienced
bidders
the
PO
auction
with
(PO), (2)
experienced
bid
with
MA
auction
the
(3)
(P02),
inexperienced
ders (MA), and (4) the MA auction with experienced
variables
of interest
bidders
(MA2). The response
realized
the
were, primarily,
buyer utility and seller

We

profits.
for a total of 24 experi
We
recruited
subjects
in
each session we exposed
where
mental
sessions,8
one of the four treatments
to
previously
subjects
of several indepen
Each session consisted
described.
or periods.
The same three bidders
dent auctions,
were matched with each other in all periods,
and each
in
PO auc
the
bidders
either
of
group
participated
for all periods. We decided
tion or the MA auction
in separate sessions
to study the auction
institutions
the
rather than using a within-subjects
design where
same subjects would
in both the PO
have participated
us to isolate
the
auctions.
This allowed
and MA
a
we
to
for
observe
effects
that
learning
expected
effects
from
order
auction
(i.e.,
type
potential
given
variation
due to the order in which
subjects would
in the different
auction
have participated
types in a
our
because
treatment).
Additionally,
within-subject
reason
was relatively homogeneous,
it
is
subject pool
that any effects relating to differences
able to assume
be small.
between
the subject groups would
In every auction (or period), subjects were provided
in the cur
with
about their bid history
information
rent auction,
their costs for delivering
the asset at all
the time
lead-time and quality combinations,
possible
current
bid
in
the
and
the
best
auction,
remaining
or not they were
the
their bid status (i.e., whether
session

group

refers

of subjects

to a continuous
is exposed

of

time where

period
to a single experimental

a fixed

treatment.

Feedback

The costs of the bidders were dif

bidder).
winning
from
to period and were different
ferent from period
bidder to bidder. The buyer's utility function was also
iden
from period to period. To help bidders
different
a tool
were provided
with
bids,
they
tify profitable
interface that would
built into the computer
compute
the profit associated with a particular bid.
com
were
A total of nine auctions
(or periods)
first
of
in
the
each
session,
experimental
pleted
a practice
for
which
those being
subjects
period
were not paid any earnings.
Each of four different
cases (labeled Case 1 through Case 4) was
repeated
A dif
once during
the eight nonpractice
periods.
in the prac
ferent case from these four was used
of cases was kept constant
tice period. The sequence
so as not to affect comparisons
across all sessions
of
results

across

sessions.

Whenever

a case

was

repeated

a session,
to bid
of subjects
the matching
within
no subject was
so
the
that
der types was
changed
same type in both replicates of each case. This elim
be associated with
inated learning effects that might
more
same bidder
than once. The
the
type
playing
were
constant
type matchings
kept
subject-bidder
across all sessions. The exact parameters
used in each
screen shots, and other
case, experiment
instructions,
are available
in the online
information
supplement
(http://mansci.pubs.informs.org/ecompanion.html).
at the
conducted
All experimental
sessions were
for
Economic
of Business's
Smeal College
Laboratory
and Auctions
(LEMA), The Pennsylva
Management
2003 and April
nia State University,
between March
or graduate
student who
2003. Any undergraduate
in this experiment
had not previously
participated
was
that
to be eligible
for treatments
considered
students
those
bidders. Only
required
inexperienced
in the PO auc
had previously
who
participated
in the
to
tion (MA auction) were
participate
eligible
treatments
that
PO auction
(MA auction)
required
bidders. The auctions were
implemented
experienced
(Fischbacher
1999).
using Z-Tree software
In the PO auction
lasted
each period
sessions,
auc
in
MA
5-10
and
the
minutes,
approximately
10-15
tion sessions, each period
lasted approximately
minutes.
took around 1-1.5
The PO auction sessions
to complete,
sessions
while
the MA
auction
hours
took around 1.5-2 hours to complete, on average. The
rate used in all treatments was 0.1 U.S. dol
exchange
fee
dollar. A $7 show-up
lars for every experimental
was
to the total earnings
of each subject at
added
incentive
cash
besides
the end of the session. No
was provided
to subjects. Subjects earned, on aver
age, $22 and $16 in the MA and PO auction sessions,
respectively.

5.
8
A

Information

Results

In this section, we compare

the performance
of the
MA auction and the PO auction for bidders with and

et al.: A Multiattribute

Chen-Ritzo

Reverse

1758

Auction

Mechanism
Science

Management

Table 1

with Restricted
Information
51(12), pp. 1753-1762, ?2005

Feedback
INFORMS

Expectedand ObservedOutcomes for EachCase and TreatmentCondition

Case

Case 2

CaseCase
3 4

ExpectedMA (PO)outcome
Quality(reserve)
Leadtime (reserve)
Buyer
utility
Seller
profit
Improvementinbuyerutility
MA (PO)observed
Averageprice
% Expectedquality
% Expected leadtime
Averagedistance
% Expectedwinner
Average buyerutility
Average

seller profit

Numberof observations
MA2 (P02) observed
Average price
% Expectedquality
% Expected leadtime
Averagedistance
% Expectedwinner
Average buyerutility
Average seller profit
Numberof observations

Price
130(550)
4(4)
10(5)
Winner
3(2)
285 (250)
62(10)
14%
646.6 (559.5)
44% (N/A)
25% (N/A)
4.33 (N/A)
25% (80%)
240.5 (241.5)
44.1

(-128.4)

between

94.5(299.8)
33% (N/A)
100% (N/A)
0.67 (N/A)
100% (100%)
94.2 (83.2)
46.8(4.0)
6(6)
6(6) 6(6)

the added complexity

of
the buyer from fully real
increases

buyer

utility.
In Table 1 we
report the expected
improvement
as
in buyer utility
in the MA
to
auction
compared
9
The

number

a technical
data

of observations
difficultly

related

in the MA
treatment
to
due
vary
to the recording
to a
of the results

file.

10
non
test is a powerful
The Wilcoxon-Mann-Whitney
rank-sum
to the standard
f-test when
substitute
data has at least
parametric
ordinal
data

measurement

from
generated
the data do not meet

(Siegel
human

and Castellan
subjects,

the assumptions

2.6

(-64.6)

126.7(630.2)
100% (N/A)
100% (N/A)
0.00 (N/A)
100% (83%)
288.3 (170.8)
58.1(87.6)
6(6)

treatments.10

auction

-6.1

1988). When
examining
to assume
it is typical
that
for a f-test.
required

2,399(2,364)

1,986 (1,870)

577.1 (381.9)
2,035.5 (2,350.6)
38% (N/A)
50%
(N/A)
44% (N/A)
36% (N/A)
2.52 (N/A)2.45
(N/A)
75% (85%)
50% (45%)
281.3 (249.1)
1,887.1 (1,884.4)

15 (20) 16

We begin by examining
the utility
that the buyer
at the end of the auction.
achieves
In theory, because
bidders
in their bidding
choice
(sellers) have more
under the MA auction, they should provide
the buyer
with higher utility. However,
the MA auction may keep
izing these potential
gains.
1. The MA
Conclusion

190.7 (297.2)
38% (N/A)
56% (N/A)
2.45 (N/A)
63% (70%)
98.5 (85.9)

16 (20)

In Table 1, we present
without
previous
experience.
outcome
the expected
the
bid, win
(i.e.,
winning
and
seller
bidder,
ning
buyer utility,
profit) and the
outcome
observed
for
both
auction
institu
average
studied. The
tions, in each of the cases and treatments
number
of observations
collected
for each treatment
in the different
institutions
is also included
in this
the results of the rank-sum
table.9 Table 2 presents
tests that we use for statistically
certain
comparing
outcomes

52(299)
561(294)
3(2)3(4) 10(9)
10(6)
3(7) 5(3)
3(2)
2(3)
1(1)
98 (84)
333 (237)
46(4)
48(6)
88(49)
41%
6% 17%

(-25.2)

115.4

(-580.5)

14
(20)
(20)
595.3(393.8)
2,090.0(2,355.2)
67% (N/A)
67% (N/A)
67% (N/A)
33% (N/A)
0.47 (N/A)1.69
(N/A)
100% (100%)
67% (50%)
300.7 (237.2)
1,863.7 (1,879.8)
62.0(5.8)
149.0(39.6)

the PO auction. Based on the expected

improvements
in Table 1 and the results
for the
reported
reported
first two sets of rank-sum
tests in Table 2, the MA auc
tion does result in significantly
greater buyer utility
when
the expected
from the MA auc
improvement
tion is large (17% or greater). With both inexperienced
can reject the
we
and experienced
bidders,
equal
the
of
observed
that
ity
buyer utility, and conclude
the MA auction provided
greater buyer
stochastically
lower
utility in Cases 2 and 3. Case 1 has a somewhat
expected
improvement
is greater
from
utility
Table 2

Wilcoxon-Mann-WhitneyRank-SumTest Results

Test(fy,)
Buyer utility

MA>P0
Buyer utility

MA2>P02
MA^PO
Seller profit

MA2^P02
distance

M/4>M/12
Note. The

Casel

Case 2

w = 325.0

w = 343.0

p = 0.1802
w = 57.0

p = 0.0023
n/ = 262.0

Seller profit

Euclidean

(14%), and we find that buyer

the MA
auction
only under

w = 53.5

p = 0.0079
w = 246.5

Case 4

tv= 368.0

w = 272.0

p = 0.0112
iv= 51.0

p = 0.0311
w = 355.0

p = 0.1764
w = 39.0

p = 0.5000
w = 385.0

p = 0.2858

p = 0.4414

p = 0.0616

p = 0.0000

iv= 33.0

iv= 51.0

u/ = 52.0

w = 28.5

p = 0.3751

p = 0.0557

p = 0.0435

p = 0.1025

iv= 210.0
= 0.0264
p

w = 220.0
p = 0.0038

left-hand column

native hypothesis
p is the p-value.

p = 0.0682

Case 3

w = 202.0
= 0.0883
p

iv= 157.0
= 0.2139

variable and the alter

represents the measured
of the statistical test, w is the rank-sum test statistic and

Chen-Rltzo
Management

et al.: A Multiattribute
Reverse Auction Mechanism
INFORMS 1759
Science 51(12), pp. 1753-1762, ?2005

the experienced
has only a small
and PO auctions
MA
it
auction,
able to conclude
the MA auction.

with

4, on the other hand,

between
the MA
expected difference
at 6%. As the toughest
test for the
is not surprising
that we are never

treatment.

Case

is greater under
that buyer utility
the
The PO auction does not provide
case.
in
any
greater utility
we have seen that the MA auction
can

buyer with
Although
to
improve buyer utility, it is worthwhile
significantly
examine how well
the auctions performed
relative to
the expected outcomes. Again,
referring to Table 1,we
on
that
MA
find
auction achieved
91%
the
average,
and 95% of the expected buyer utility for the inexpe
rienced and experienced
The
treatments,
respectively.
PO auction
tends to yield slightly higher utility than
On average,
the PO auction yields
101%
predicted.
of the buyer utility predicted.
This difference
disap
treatment, and the P02 auc
pears in the experienced
tion only yields
92% of the predicted
buyer utility.
The auctions' performances
relative to the theoretical
benchmarks
shed light on the fact that we did
may
not always observe a significant
increase in buyer util
ity in the MA auction relative to the PO auction. At
least for the inexperienced
the MA auction
treatments,
full expected
fails to achieve
buyer utility, whereas
to overshoot
the PO
auction
tends
predictions
slightly.
The winning
bidder, quality, and lead time are fre
for the MA auction format. As an
quently as predicted
additional measure
of the closeness
of the observed
bid to the expected
multiattribute
bid, we
report
distance
(Table 1) the Euclidean
levels from
ity and lead-time
MA auction. With the exception

of the observed
qual
in the
those expected
of Case 1 for the MA

this distance
is usually
small.
auction also offers potential
gains for the
In all four cases, the theoretical
bidders.
seller profits
are higher under the MA auction than the PO auction.
seem to contradict
this may
the previous
Although
of the MA auction often
result, the added flexibility
benefits
both parties. We examine
seller profitabil
in Conclu
auction institutions
ity under the different
sions 2 and 3.
2. The MA auction does not degrade,
Conclusion
and occasionally
increases, seller profits.
treatment,
The MA

The third and fourth sets of rank-sum

tests in
Table 2 compare seller profits in the MA and PO auc
tions. In no case can we conclude
that seller profit is
In some cases, 3 and 4
higher under the PO auction.
for inexperienced
bidders and 2 and 3 for experienced
seller profits
increase
bidders,
actually
significantly
are con
under
the MA auction. These observations
sistent with
the theoretical predictions;
for the cases
studied
the theory predicts higher
seller profits. We
did not study cases where
the theory predicts
lower
seller profits.

Restricted

Information

Feedback

1 shows, average
seller profits are often
This is because,
sellers placed
negative.
occasionally,
not individually
In 11 out
bids that were
rational.
of 80 (14%) PO observations
and 5 out of 62 (8%)
MA observations,
the winning
bidder ended up los
it is impossible
to determine
While
the
ing money.
source of this behavior,
were
not in any way
bidders
forced to bid below
their cost (at a loss) and were
As

Table

to help avoid
checks
given
the most
likely determinant

this behavior. We
of these losses was
had to understand

feel
the
in

the bidders
complex
setting
a time-constrained,
which
environment,
competitive
was our primary motivation
for studying
these auc
tions experimentally.
Conclusion
3. The frequency
of seller losses are
not

to the auction institution.

the somewhat
of bid
greater prevalence
in the PO auctions,
there is no statisti
difference
between
the proportion
of
cally significant
with
observations
losses under
the different
institu
tions. A chi-squared
test for differences
in proportions
a test statistic of 0.5807, which
is not signifi
yields
cant at any reasonable
level. The fact that there is little
related

Despite
der losses

in the observed
difference
of losses under
frequency
the two institutions
is actually
somewhat
surprising.
A priori we expected
that bidder errors would
be a
in the MA auction.
In principal,
the
greater problem
PO auction was no different
from a standard reverse
where previous
experiments
rarely observed
it appears
losses. However,
that the added
of the multiattribute
cost tables, despite
information
in the bidding,
its irrelevancy
have affected
might
bidder
behavior.
with
Consistent
other experimen
tal studies of auctions, we have
identified behavior
that differs dramatically
from the theory. The level of

auction,
bidder

losses actually
tends to be greater in the PO auction
as well;
losses averaged
dollars
1,641 experimental
in the PO auction versus 217 experimental
in
dollars
a rank-sum
the MA auction. Using
test, we find that
losses under the PO auction are stochastically
larger
= 57.0 and
(w
p < 0.0200). These high losses also affect
the buyer utility results presented
earlier because bid
as increased
der losses tend to manifest
themselves
for the buyer. When
with
observations
losses
utility
are removed, we find that the PO auction
buyer utility
as a percentage
of expected drops from 101% to 93%.
The decline
in the MA auction
is more modest
from
91% to 88%. All buyer rank-sum utility comparisons
earlier in support of Conclusion
1 still hold
presented
if observations
with
losses are dropped.
never made
bidders
losses in either
Experienced
treatments. Therefore,
the P02 or MA2
it appears that
losses might be more related to learning the interface
and environment
rather than some systematic
prob
our
lem with
the auction
setup. This also suggests
next

conclusion.

et al.: A Multiattribute

Chen-Ritzo

Reverse

Auction

Mechanism
Science

1760 Management

4. Performance
auction
of the MA
Conclusion
with
institution
improves
experience.
While
buyer utility and seller profits rarely change
to the experi
from the inexperienced
significantly
treatments
Table
the
auctions
enced
(see
2),
appear
to perform more consistently
with expectations
when
the
bidders. When
there are experienced
comparing
MA

and MA2

the predicted
to 92%. The

the proportion
treatments,
increases
winner
is observed

of times
from 53%

of correctly predicted
proportion
qual
from 42% to 67% and
ity and lead times increases
in
These differences
from 40% to 75%, respectively.
a
are
at
the
10%
chi
all significant
level;
proportions
test
these proportions
yielded
squared test comparing
and
6.993
of
9.485
3.303
statistics
(winner),
(quality),
distance
the Euclidean
(lead time). If we measure
combination
and
lead-time
of the winning
quality
from the expected
outcome, we find that it decreases
In three of four cases,
from 2.96 to 0.71 on average.
to
the distance drops significantly
from inexperienced
a
as
treatments
As
Table
result,
(see
2).
experienced
mentioned
earlier, the observed buyer utility as a per
from 91% to 95%
increases
centage of the predicted
with experience.
less
of the PO auction
The performance
improves
are
no
and
observed
losses
longer
dramatically. While
and
bidders
the reservation
quality
always provide
times
that
the
lead time,11 the proportion
of
predicted
bidder wins
from 70% to 83%, which
only increases
test statis
is not statistically
significant
(chi-squared
tic of 1.059). In addition,
buyer utility actually goes
as a
relative to predicted
down
utility; buyer utility
to
93%.
of predicted
percentage
drops from 101%
the aggre
results have highlighted
The previous
of the MA and PO auctions. We can
gate performance
and how it
individual
behavior
also examine
bidding
to the theoretical
Bidders
should
predictions.
at
and
lead
the
levels
of
quality
optimal
place
auction. Only
9% and 11%
time (??*,/*) in the MA
in the MA
and MA2
of all bids placed
treatments,
are at the predicted
levels. This is not
respectively,
once one considers
the fact
surprising
particularly
relates

bids

that bidders must bid to learn the buyer's utility func

we would
tion in the experiments.
However,
expect
that bids near the end of the auction will be close to
levels. When
the optimal
only the best
considering
(highest utility) bid placed by each bidder, the propor
to 19% (MA) and 31%
tion of optimal bids increases
in proportions
is significant
(MA2). This difference
test statistic of 3.26),
at the 10% level (chi-squared
of
the incidence
increases
that experience
indicating
this
with
the theory. Although
behavior
consistent
even
in the
result
tells us that bidding
behavior,

quality

the

treatment,
inexperienced
lead time in excess
and/or

three
of

bidders

the reservation

either
provided
amounts.

Feedback
INFORMS

is often different
than the the
treatment,
experienced
are
it
be
that
bidders
ory predicts,
may
only mak
errors
in
small
their
Given
the struc
ing
bidding.
ture of the cost and utility
functions
there
utilized,
movements
to
small
from
be
the
effi
may
gains
only
cient quality and lead-time
levels. By measuring
the
Euclidean
distance
of each bidder's
best bid from
the predicted
levels, we have a
quality and lead-time
measure
of distance
from the predicted
strategy. In the
MA and MA2
the distance
2.40
treatments,
averaged
is
and 2.01, respectively.
Even more
that
only
telling
one
3 out of 33 total bidders
bids within
averaged
unit distance
of the optimal
strategy.
are not always bidding
Even though bidders
the
correct levels of quality and lead time, they may
still
in utility
be placing
bids close,
terms, to the opti
mal bid. In theory, losing bidders
should offer a bid
at the efficient quality
all the surplus,
that provides
and lead time, to the buyer. By examining
the highest
we can examine
the
utility offers of the losing bidders,
accuracy of this benchmark.12 We can examine when
leave "money on the table," or they do
losing bidders
not bid despite
the fact that there was a profitable bid
bid. In the
beat the final winning
for them that would
51%
of
bidder
obser
treatment,
inexperienced
losing
are
two
vations
auction
observations
for
each
(there
a profitable
failed to bid when
bid was avail
period)
able. The proportion
falls to a more
but
reasonable,
treatment. A chi
still large, 35% in the experienced
in these proportions
yields
squared test for difference
a test statistic of 2.70, which
at the 10%
is significant
the previous
level. This suggests,
result,
along with
are often failing to realize the optimal
that bidders
to the relatively
strategy. This is in contrast
bidding
on an aggre
MA
auction
of
the
strong performance
must
it
these
be that
level.
To
reconcile
results,
gate
is close to
the actual utility offered by these bidders
the theoretical prediction. We can measure
this by cal
the utility of each losing bidder's
best bid
culating
the buyer with
the greatest
(i.e., the bid that provided
util
of the maximal
possible
utility) as a percentage
that
bidder
could
offer
of
(i.e., provision
greater
ity
result in bidder
losses). Figure 1
buyer utility would
the fraction of the maximum
possible
buyer
was offered by each losing bidder's
best
that
utility
treat
In the MA and MA2
bid in the MA auctions.13
offer 57% and
the losing bidders
ments,
respectively,
shows

12
The bids

bidders
of the winning
when
others
stop bidding

should
bid
13

to their zero

up

profit

cannot

be examined

stop bidding.

Thus,

because
they will

they
not

point.

to note
that this measure
is biased
downward.
It is important
is following
if a losing bidder
the optimal
she may
Even
strategy,
to be offering
This
is
less than 100% under
this measure.
appear
because
offer

11
In

with Restricted
Information
51(12), pp. 1753-1762, ?2005

essary.
pliance

over
bidder may
the maximal
the winning
utility
jump
of such a bid unnec
the losing bidder, making
placement
to use this measure
it gives noncom
because
We decided

of

with

the theory

the benefit

of

the doubt.

Chen-Ritzo
Management

et al.: A Multiattribute
Reverse Auction Mechanism
Science 51(12), pp. 1753-1762, ?2005
INFORMS 1761

Figure 1

with

Restricted

Fractionof MaximumAvailable BuyerUtilityOfferedby

Losing Bids Only

Information

Table 3

Rank-Sum

Wilcoxon-Mann-Whitney

Test

p-value

Mann-Whitney

0.8

Test

?0.6

Xxxx

x\

CO

X MA

0.2

test statistic (w)(p)

(HA)

xX

***?**.
x

xxx

Results

Comparing Proportions of Maximum Available

BuyerUtilityOfferedby Losing Bids

1.0

1,075.5
PO^MA
684.0
PO^MA2
214.0
P02^MA
104.0

P02^MA2

0.0000
0.0049
0.0144
0.1120

MA2
Note. The

Feedback

X
12

XX

)X?3?
3

i-Xa

i-r^X-rX-Xr
4
5

left-most column

of the statistical

represents

the alternative

hypothesis

test.

Period

individual
is not exactly as
bidding behavior
across
in
it
consistent
is
predicted
theory,
relatively
the two auction mechanisms.
Individual behavior
also
to
the
closer
behavior
with
gets
predicted
experience
in the MA
that the added
auction.14 This suggests
of the auction environment
does not lead
complexity
to systematically
different
behavior.
Variations
from
the theory are expected
in both cases, and highlights
the need to study auction design
from experimental
a
in
to
addition
theoretical
devel
perspective
purely
cases
seem
in
The
fact
that
to
both
bidders
opment.
While

possible utility on average. Using

find that losing bidders
leave sig
more
on the table in the inexperi
money
nificantly
case (w = 348 and
enced case than in the experienced
<
p
0.016).
Conclusion
5. Individual
in the
behavior
bidding
is different
MA auction
than the theory predicts, but
improves with experience.
on bidder
Given
results
previous
experimental
78% of the maximal
a rank-sum
test, we

in auctions,

sur
it should not be entirely
for
the
theoretical
prising
specific
predictions
a
MA
auction
do not do particularly
well.
Rather,
more
to
would
be
the
indi
appropriate
comparison
vidual
In the
behavior
in the PO auction.
bidding
behavior

that

PO auction, theory predicts

that losing bidders should
bid up to their zero profit condition
at the reserve
same
as
and
lead
time.
the
standard
quality
Using
presented

earlier

for the MA

auction, we

find that 31%

(PO) and 39% (P02) of all losing bidders leftmoney

on

the table. When

to the MA
treatments,
compared
the
PO
is significantly
smaller than
only
proportion
the MA proportion
test statistic of 7.68).
(chi-squared
are
In both cases, these proportions
indistinguishable
from the MA2 proportion
of bidders
failing to make
we
If
bids.
calculate
the
profitable
utility of the los
as
a
bidders'
best
offer
of the maximal
ing
percentage
for that bidder, we find that, on
offered 92% and 90% of the maxi
for the PO and P02 auctions,
respec

offer available

utility
average, bidders
mal utility offer
tively. Ifwe compare

the percentages
of the maximum
in the PO auc
offered
bids
by losing
utility
tions with
those in the MA
find that,
auctions, we
at the 5% level, only the P02 and MA2
are
auctions
not significantly
different. Therefore, with experience,
available

the percentage
of the maximum
available buyer
offered
bids
is
consistent
between
ity
by losing
two auction
The
results
of
the
rank-sum
types.
are provided
for these comparisons
in Table 3.
Conclusion
ual

bidding

auctions.

6. At
behavior

least with
is similar

experience,
in the MA

util
the
tests

behave

reconcile
the superior
aggre
similarly helps
auction
of
the
MA
to the
gate performance
(compared
PO auction) despite obvious
deviations
from the the
oretical benchmark.

6.

Conclusions

The

results

and Future Work

here
presented
of MA
auctions

are promising
for the
for procurement
when
matter.
bid
Providing

application
several nonprice
components
ders with
information
the
only marginal
regarding
buyer's utility, we are able to construct a simple auc
tion mechanism
that clearly betters,
experimentally,
the PO auction
format where
and lead time
quality
are set in advance. The MA auction benefits both the
the expected dif
buyer and the sellers. It is only when
ferences are small that we do not observe
significant
from the experimental
MA auction.
improvements
The experimental
real
results, by showing where
from
differs
ity
theory, provide
potentially
important
Bidder
insights into the MA auction design problem.
was not perfect.
behavior
It took experienced
sub
an
on
to
MA
that
auction
jects
get
closely matched,
an aggregate
the
dominant
level,
strategy predictions.
Even then, individual
behavior was not par
bidding
The level
ticularly close to the theoretical predictions.
of bidder losses was also not predicted. Despite
these
the
MA
auction
still
differences,
outper
consistently
forms the PO auction
in the lab. However,
future
more
or
for
realistic
designs
complex
settings might

individ
and PO

14

to note
It is interesting
in the PO auction.

true

that the same

trend does

not

appear

to be

et al.: A Multiattribute

Chen-Ritzo

in an attempt

consider
these deviations
better MA auction.

to design

This study has focused on the behavior

of bidders
in the multiattribute
attributes
setting. When multiple
the
of
the
decisions
should
also be
matter,
buyer
An
considered.
auction
issue facing the real-world
not
is
that
the
know
his
designer
buyer may
utility
learn about what he wants
function.
Instead, he must
in
the different
available. Also,
by observing
options
are
a
num
chain
auctions
there
many
great
supply
ber of interdependent
simulta
objects being procured
a
care
For
about
neously.
example, while
buyer may
quality and lead time, he may also care about which

Reverse

Auction Mechanism
Science
1762 Management

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The authors gratefully acknowledge
support from the Cen
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of Business Markets
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