Costly Bidding in Online Markets for IT Services

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets—the market for software development. These markets are important both because they provide an early view of the e...

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Bibliographic Details
Published in:Management science 2003-11, Vol.49 (11), p.1504-1520
Main Authors: Snir, Eli M, Hitt, Lorin M
Format: Article
Language:English
Subjects:
Auction markets
Auctions
Bidding
Bids
Business studies
Commodities
Contracts
Costs
Electronic commerce
Electronic Markets
Information technology
Internet
Logistics
Market prices
Modeling
Online shopping
Opportunistic behavior
Participation
Procurement
Purchasing
Quality standards
Request for proposal
Reverse Auctions
Software
Software Contracts
Software development
Studies
Transaction costs
U.S.A
Vendors
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Summary:Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets—the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%–40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.49.11.1504.20587