Source:
Management Science, Volume 49, Issue 11, p.1504-1520 (2003)
Keywords:
Internet;
Electronic Markets;
Software Contracts;
Reverse Auctions;
Bidding
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.