The Effect of Asymmetric Bidder Size on an Auction’s Performance: Are More Bidders Always Better?

Abstract

One commonly held belief in designing auctions is that increasing the number of bidders makes an auction more competitive. Therefore, a buyer who wishes to minimize her procurement costs is better off inviting more suppliers to participate. In this paper, we question the validity of this belief by shedding light on bidders’ behavior when bidders experience economies of scale in production and differ in their production capacity. We consider a setting with two different sized bidders, global and small. We assume that global bidders have a large production capacity (can win in more than one auction) and experience economies of scale in production, whereas small bidders can win in at most one auction. In this new setting, we focus on the impact of allowing both global and small suppliers to compete against each other on the performance of an auction.