Timothy Salmon

Presenter:  Timothy Salmon 

Paper: “An Investigation into Dynamic Reserve Prices in Procurement Auctions," joint work with Farasat Bokhari, Sean Ennis, and Carlos Vega:  

Abstract: 

The Philippines uses an auction design to procure pharmaceuticals for its public hospitals which involves dynamically adjusting reserve prices over time, tying them to the closing prices in previous time periods and in other regions. The idea behind this design is to harvest competition in very competitive areas to keep prices low in less competitive areas and to try to put downward pressure on prices over time. While it is intuitive that such reserve prices might control prices there are also some potential concerns from such a design. The main possibilities are that bidders learn to bid less aggressively so as not to constrain the prices they could get in the future and the possibility that setting prices in one market based on the costs to supply in another market could close out smaller markets.  We investigate these concerns using an experiment designed to test for these countervailing possibilities. We find that, without a bid cap, dampened competition does lead to higher prices after bidders exit. Imposing a dynamic bid cap solves this issue of higher prices but knocks more people out of markets, leading to widespread failure of auctions. Surprisingly, bidding behavior remains similar across bid cap institutions during the first round indicating that bidders are not bidding less aggressively to impact future bid caps. In subsequent rounds, bidding becomes deceptively more competitive in auctions with bid caps, but this comes with the undesired effect of destroying many markets.