Operations, Information and Decisions Papers

Document Type

Working Paper

Date of this Version

11-2003

Publication Source

Management Science

Volume

49

Issue

11

Start Page

1504

Last Page

1520

DOI

10.1287/mnsc.49.11.1504.20587

Abstract

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets—the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%–40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.

Keywords

Internet, electronic markets, software contracts, reverse auctions, bidding

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Date Posted: 27 November 2017

This document has been peer reviewed.