The Effect of Offer Verifiability on the Relationship Between Auctions and Multilateral Negotiations

We use the experimental method to compare second-price auctions to “verifiable” multilateral negotiations in which the sole buyer can credibly reveal to sellers the best price offer it currently holds. We find that transaction prices are lower in verifiable multilateral negotiations than in second-price auctions, despite the two institutions’ seeming equivalence. The difference occurs because low-cost sellers in the negotiations tend to submit initial offers that are less than the second-lowest cost. We also compare the two institutions to previously studied first-price auctions and multilateral negotiations with nonverifiable offers. Second-price auctions yield the highest prices, followed in order by verifiable negotiations, nonverifiable negotiations, and firstprice auctions. * We thank Paul Oyer, David Schmidt, and seminar participants at George Washington University and the INFORMS 2001 Annual Meeting for helpful comments, the International Foundation for Research in Experimental Economics for providing financial support, and Todd Swarthout for writing the software. The data and a demonstration copy of the instructions are available upon request. This work reflects the opinions of the authors and does not necessarily reflect the position of the Federal Trade Commission or any individual Commissioner. JEL: C78, D44, C9, L14