E-Sourcing: Value of Incumbency and Bidding Behavior

While there is an ever increasing adoption of e-sourcing, where the buyer auctions procurement contracts to a small group of pre-qualified suppliers, there is a lack of understanding of how this Internet-enabled process affects the value of incumbent suppliers and suppliers’ bidding behavior. In this paper, we explore the effect of incumbent status on bidding behavior, auction price and contract awarding decision in online procurement auctions for manufacturing goods. We collected detailed reverse auction data during 2002-2004 from a major buyer in the high-tech industry. Our data is unique as it not only captures the entire auction history, but also records historical pricing data and final contract awarding decision since winning the auctions does not guarantee winning the contract in most business-to-business procurement auctions. Our data covers bidding history of 233 contracts from 36 auctions, 106 suppliers submitted a total of 3,206 bids. This allows us to cluster bidding strategies of industrial participants. We uncover heterogeneous bidding patterns in reverse auctions. The distribution of these bidding strategies varies between incumbent and non-incumbent suppliers. We also find that while incumbents’ final bids are higher when using three out of the five bidding strategies, their final bids are lower when using the other two bidding strategies. Within winners, buyer’s cost savings are lower from incumbents. However, on average, incumbents are about two times more likely to win a contract than non-incumbents. The marginal effect of incumbent status dominates that of lowest bidder status, revealing buyer’s preference over incumbent suppliers. Focusing on recurring auctions, we find that suppliers bid adaptively. The adaptive bidding is affected by incumbent status: once the incumbent status is obtained from earlier auctions, suppliers tend to bid scarcely but actively throughout the successive auctions. These findings reveal the advantage of incumbent status in procurement auctions as well as its impact on suppliers’ bidding behavior. It provides empirical evidence for future research and optimal auction mechanism design.