Reverse Auction Bidding Further Elements to the Game Theory



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Reverse Auction Bidding systems are increasingly used by some large corporations for the supply of buildings, an example is the major firm Target. The belief is that the Reverse Auction Bidding system improves the efficiency of the bidding system and leads to cost savings during the construction process. Neither statement has been shown to be correct at this time. A game theory was developed for the Reverse Auction Bidding system; this theory postulated that two sub-games exist within the overall Reverse Auction Bidding game. The first sub-game is between the purchaser and the set of bidders. The purchaser is presented with a group of lowest prices that under the rules of the game must be accepted. This group of prices has been shown to have a non-normal distribution in prior research at TAMU. If economic efficiency was to be maintained by the bidding system, one would expect a normal distribution with a tight range on the standard deviation, which does not occur. The second sub-game is between the bidders, who make use of the non-normal aspects of price group to maximize individual returns. All things being equal and given the intent of the game, the purchaser would expect the bidders return to be normally distributed with a small standard deviation representing a tight control on price, which has never been observed in game play. Three types of bidders have been postulated for the set, the first is an economically efficient bidder, an economically inefficient bidder, and a middle of the road bidder.

This study aims to compare statistically the difference between economically efficient bidders, Type ? bidder, and economically inefficient bidders, Type ? bidder, in terms of the statistical properties of the return data. The central hypothesis is that a statistically evident bias exists between the average return generated by the Type ? bidder and the Type ? bidder. The addition of the two distributions along with the average return generated by a Type ? bidder results in the observed distribution for the group, L. The secondary hypothesis is that Type ? bidders minimize the price reduction for each bid. The first hypothesis is true, the Type ? bidder earn on average twice the returns of the Type ? bidder. The second hypothesis is not true, the Type ? bidder as a set do not attempt to minimize the bid differentials. Further research is suggested on the statistical properties of the bid differentials as more games are played at TAMU.