Exploiting Uncertainty about the Number of Competitors in Procurement Auctions

In procurement practice first-price auctions are used if the number of potential suppliers is small and second-price auctions if it is large. This observation cannot easily be explained by standard economic theory as suppliers should anticipate little competition whenever they participate in a first-price auction. We test this setup experimentally and find that buyers employ this strategy. Suppliers on average interpret the buyer's selection of a first-price auction as a signal of low competition. However, most suppliers still overestimate the degree of competition in first-price auctions. As a consequence, they bid too aggressive in first-price auctions, which rationalizes buyer's format choice.