Effects of Information Revelation Policies Under Cost Uncertainty

• Published in: Information systems research 2012-03, Vol.23 (1), p.75-92
• Main Author: Kannan, Karthik N.
• Format: Article
• Language: English
• Subjects: Analysis; Auctions; Bidding; Bids; Cost efficiency; Costs; Deception; Economic models; economics of information systems; Electronic commerce; electronic markets; Impact analysis; Information policy; information revelation; Information storage and retrieval systems; Nash equilibrium; perfect Bayesian Nash equilibrium; Pliers; Procurement; Social welfare; Studies; Technology and state; Uncertainty
• ISSN: 1047-7047; 1526-5536
• DOI: 10.1287/isre.1100.0292

The paper presents insights regarding the key learning-related factors a buyer should consider when deciding the extent to which information about bids is revealed in a procurement auction context. It offers the insights by analyzing the following two first-price sealed-bid policies in a private-value sequential auction with no winner dropouts: (i) iis , where only the winner's bid is revealed, and (ii) cis , where all bids are revealed. Our analysis identifies two important learning effects-the extraction and the deception effects-as having significant welfare implications. Both these effects arise because of a bidder's desire to gain an informational advantage relative to his competitors, but their manifestations are different. The extraction effect occurs because of a bidder's incentive to learn about his competitors, and the deception effect is a consequence of the incentive to prevent an opponent from gaining the information. Both effects lead to higher bid prices, and either may be dominant from a procurer surplus standpoint. With the deception effect, social welfare can decrease even when the number of suppliers increases, a result that is counterintuitive. The paper also discusses how insights regarding the learning effects might apply to other policies.