Competition and the winner's curse in B2B reverse auctions

This chapter studies the negative effects of the Winner's Curse, a phenomenon found commonly in auctions. We define the idea of a Winner's Curse an specify the types of auctions in which this could be prevalent. We look at the data provided by a major multinational corporation on online procurement auctions conducted by them. We specify the effect that this Winner's Curse would have on the success of procurement auctions. Using this theoretical background, we analyze the given data and show that in some cases, the presence of the Winner's Curse and the subsequent need for bidders to show caution in the presence of the Winner's Curse could lead to lower auction success for the firm. We specify the particular cases where this is true. This leads to managerial implications for firms wishing to conduct procurement auctions online, and we spell them out. We also provide some examples of how firms might try and lower the negative effects of the Winner's Curse. Finally we provide some future research ideas that may be pursued and some additional readings for the curious reader.