Executive Summary
Across many industries, there is a growing use of online, reverse auctions in industrial procurement activities. These auctions are capable of generating considerable economic cost savings, but they can also affect supply relationships for better or worse. To date, there is little research that has considered how such supply relationships might affect bidder behavior during the course of the auction. In this research, the authors examine how supplier relationships affect bidding aggressiveness (or the lack thereof) in a reverse auction and the subsequent impact of this behavior on the relationship after the auction.
The authors use 12 online reverse auction events involving $126 million in purchase contracts in the automotive and high-tech industries. Specifically, they survey suppliers on their relationship with a focal buyer before the auction. They also collect information on the supplier’s total number of bids, the rate at which bids are submitted, and the total price concessions offered in the auction. Then, they survey suppliers about their relationship after the auction and use mathematical modeling techniques to examine the interplay between relationships before and after the auction and bidding behavior over the course of the auction.
The results are illuminating. Specifically, they reveal that buyers can anticipate less aggressive bidding from (1) incumbent suppliers, (2) in events with a large number of bidders, and (3) from suppliers who are willing to make specific investments on the buyer’s behalf. However, as bidding heats up in an auction and more and more bids are submitted, suppliers will bid more aggressively on average. Aggressive bidding will sour relationships; these suppliers are less willing to develop a long-term relationship and become less satisfied with their existing relationship with the buyer. Finally, auctions that are longer in duration can help the relationship but decrease the rate of bidding.
The results give buyers insight into how suppliers view aggressive bidding in relation their relationship with the buyer. Specifically, suppliers appear to trade off their intangible value (e.g., their past experience and history with a buyer, their willingness to make specific investments) against their price concessions. Thus, high bids do not necessarily mean that suppliers are not bidding aggressively; the “total value” of suppliers is more than just price. This “total value” perspective of prices and relationship value has implications after the auction. The results suggest that suppliers who feel forced into making price concessions in the auction will also reduce their willingness to engage in and develop the relationship more deeply with the buyer, which holds detrimental implications for the future. As relationships become more transaction and price focused, suppliers may be motivated to actively seek alternative buyers, retaliate, or act opportunistically in the short run. One approach that buyers can use to mitigate this is to lengthen the auction duration, though this might put some level of price savings at risk. Collectively, the research provides a better understand of how industrial pricing and long-term relationships are intertwined and traded off in exchanges.
Biography
Sandy Jap’s research focuses on the development and management of interorganizational relationships and e-procurement processes, such as online, reverse auctions. His research has been published various books and journals, including Journal of Marketing Research, Journal of Marketing, Marketing Science, Management Science, and Organization Science. She recently received the Lou Stern Award (2007) for research on marketing channels and distribution with the greatest impact three to eight years after publication. Her dissertation was an O’Dell award finalist, and she was named one of the top 20 young scholars by the Marketing Science Institute in 2003. Currently, she is an editorial board member at Journal of Marketing Research, Journal of Marketing, and Marketing Letters and an area editor for International Journal of Research in Marketing. Before joining the Goizueta Business School at Emory University, Sandy was on the faculty at the Sloan School of Management at Massachusetts Institute of Technology. She received her PhD from the University of Florida.
Ernan Haruvy is Professor of Marketing in the School of Management at the University of Texas at Dallas. He received his PhD in Economics from the University of Texas at Austin. His research primarily relies on experimental methodology and economic theory. His current research interests include market design, procurement auctions, matching, coordination, learning, and promotions. His publications include in American Economic Review, Marketing Science, Management Science, Journal of Business, Journal of Finance, and Economic Journal.
J Marketing Research, Volume 45, Number 5, October 2008
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