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Effect of Auction Design on Bidder Entry: Evidence from an Online Labor Market

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Effect of Auction Design on Bidder Entry: Evidence from an Online Labor Market Proceedings of the 51st Hawaii International Conference on System Sciences j 2018 Effect of Auction Design on Bidder Entry: Evidence from An Online Labor Market Yili (Kevin) Hong Benjamin Shao Arizona State University Arizona State University [email protected] [email protected] Pei-yu Chen Chen Liang Arizona State University Arizona State University [email protected] [email protected] Abstract compete for contracts and offer services. Online labor We propose that auction duration and auction matching platforms have been expanding at an description are two important auction design astounding pace since its inception. The Bureau of parameters that could serve as screening mechanisms Labor Statistics estimates that more than 30 million for quality in online auctions. Using data from an online people now work as independent professionals in the US labor matching platform that connects buyers with IT alone. Due to their significant impact on economy, service vendors, we examine the effects of auction online labor matching platforms have also drawn much duration and auction descriptions on auction outcomes attention in the academic literature [1-6]. Most of the (i.e., number of bids, bidder quality, bidding price) and extant literature focuses on the rules governing the project outcomes (i.e., project being contracted and selection of winning providers [1, 4, 7]. While the being completed). Our empirical analyses show that, in selection of winning bid is important, it is only half the buyer-determined reverse auctions of online labor story, both because how bidders are attracted to the matching, auctions with a longer duration and a longer auctions (i.e., auction outcome) reveals important description attract more bids, but they also attract more implications for who the buyers could contract and low quality bidders with less experience and lower because whether a project is successfully carried out completion rate, and hence result in a lower probability (i.e., project outcome) is very important from the of successful contracting and completion of software buyers’ perspective. As noted in the extant literature, service projects. Our research provides empirical different auction designs could significantly alter the evidence highlighting the strategic roles of auction strategic behavior of bidders [3]. Surprisingly, there are design parameters like auction duration and very few empirical papers that examine the role of descriptions as a potential screening mechanism for auction design parameters in affecting auction outcomes online labor matching platforms. and project outcomes. This paper seeks to provide a new lens of screening to understand the role of two auction design factors: auction duration and auction description. Among different auction design parameters of online 1. Introduction labor matching platforms, prior research has squarely focused on bid visibility [3]. Similar to other auction Advanced information and communications settings, auctions in online labor matching platforms technologies have enabled global online labor matching allow buyers to vary multiple design parameters (e.g., that facilitates the pairing of buyers with service project category, project budget, auction duration, providers across the globe with low search and auction description), among which project category is transaction costs. These markets usually operate in the exogenous (e.g., software development, web design, form of reverse auctions, where buyers post “Call for etc.). Although buyers also set the project budget, it is Bids” (CFB) and service providers submit bids to largely determined by the complexity of the project. URI: http://hdl.handle.net/10125/50321 Page 3411 ISBN: 978-0-9981331-1-9 (CC BY-NC-ND 4.0) Buyers have the most degree of freedom in setting auction duration and providing auction descriptions. Therefore, auction duration and descriptions are the key design parameters when launching an auction by a Table 1. Related Studies on Auction Duration buyer. Intuitively, one would expect longer auctions and Authors Context and Key insights more detailed auction descriptions to benefit the buyers, (Year) Method as they can help attract more bidders and reduce project Cox [9] Forward auction Longer auctions (Observational) attract more bids. uncertainty for the bidders. Therefore, auctions with longer duration and more detailed descriptions are Ariely and Forward auction Auction duration presumed to produce better auction outcomes and Simonson [10] (Observational) negatively affects 1 project outcomes . However, this is yet to be empirically final price. corroborated. Especially, the relationship with respect to Bapna et al. eBay, forward Longer auction project outcomes has not been studied much but are [11] auctions negatively affects (Observational) price dynamics. arguably the most important to buyers. Mithas et al. Reverse auctions Auction duration Therefore, our first research question is: does longer [12] (Observational) has no effect on auction duration lead to better or worse auction buyer surplus. outcomes and project outcomes for online labor Haruvy and eBay and a local On eBay, longer Leszczyc [8] auction site, duration leads to matching platforms? forward auctions more bids and a (Experiments) higher price; no Auction duration is an essential aspect of online effect is found at auction design. Unlike traditional English auctions held the local site. Bapna et al. Overlapping auctions Longer auction in auction houses where bidders gather in a room to bid [12] (Observational) leads to higher for a product within a few minutes, online auctions bid prices usually last for days, sometimes even months. Duration of the auction is generally a decision of the buyer, and it may have a significant impact on the bidders’ decision Auction description, on the other hand, has not been to enter the auction. Haruvy and Leszczyc [8] have studied as much. An intuitive view is that detailed provided a comprehensive review of the literature that descriptions reduce bidder uncertainty as longer looks at auction duration’s impact. In highlighting descriptions help bidders better understand project important results related to auction duration from the requirements, and hence they can help achieve better literature, we summarize the key findings in Table 1. As outcomes. This also implies that projects should have can be seen, the context of most of these studies is fairly detailed descriptions. However, anecdotal ordinary forward auction, in which price is the outcome observations suggest that there is huge variation in variable and tends to go up as the auction continues. Our auction descriptions even for the same type of projects research, instead, focuses on reverse auction in the (e.g., build a website). This variation allows us to study context of online labor matching market where price and understand the effect of auction descriptions on tends to go down when bidders compete with each other auction outcomes. Our second research question is: does in order to win the bid. The conventional view is that longer auction description in an auction lead to better longer auctions would perform better, as they attract or worse auction and project outcomes for online labor more bidders and bids, which in turn would result in matching platforms? Given that project contracts and better outcomes. On the other hand, an opposing and the actual details are only provided after a winning unconventional view is that while longer duration bidder has been chosen, auction descriptions may not be attracts more bids, it may drive away impatient bidders as essential as one assumes in the bidder’s decision to or bidders who can afford to forego the opportunity by submit a bid or the buyer’s selection of the eventual taking on other shorter-duration auctions, therefore service provider. By the same token, capable bidders inadvertently resulting in adverse selection and may be less dependent on description details, but novice negatively impacting project outcomes. Therefore, bidders would be more receptive to the requirements of while seemingly intuitive, the effect of auction duration projects. If this is indeed the case, then auction on project outcomes is not as straightforward and clear- descriptions may serve (unknowingly) as a screening cut as one might think and warrants an in-depth mechanism for bidder quality. In essence, since longer empirical investigation. auction descriptions provide more details and hence 1 Auction outcomes include number of bids attained and overall bidder successfully completed, conditionally on a service provider being quality in an auction, while project outcomes refer to whether a service selected. provider is awarded the contract and whether the project is Page 3412 reduces bidder’s uncertainty about the project, one services providers and have billions of dollars’ worth of would presume that longer auction descriptions lead to transactions, boasting a “Freelancer Economy” and greater performance. However, more experienced and becoming an exemplar for the emerging gig economy. capable bidders may be less sensitive to such project Our empirical data is obtained from the proprietary uncertainty than less experienced and capable bidders, database of a large online labor matching platform, so longer auction descriptions may in fact attract a larger which employs the mechanism of buyer-determined proportion of low quality bidders, thus hurting reverse auction [1, 3, 5, 6, 13]. Buyers initiate “call for performance. We are interested
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