Split Award Auctions: Insights from Theory and Experiments

In this paper we consider two split-award auction formats: the sealed (pay-as-bid) format and the open descending price format. In both the formats the buyer announces the splits upfront. These splits have to be consistent with the sourcing rules that the buyer uses as part of its overall strategy. We characterize the symmetric equilibrium bidding strategy of suppliers in both the formats and find that the two auction formats are equivalent in terms of expected buyer's cost. We also find that for non-regular cost distribution the buyer might optimally multi-source more than what is strictly necessitated by the sourcing rules, whereas this is never true for regular cost distribution. The results from controlled laboratory experiments, involving human subjects, indicate that expected cost equivalence fails because suppliers bid more aggressively in sealed-bid auction. Moreover, experimental results indicate that the model does a good job of predicting the relationship between buyer's average cost and concentration of allocation as well as the cost of multi-sourcing.