The Effect Of Bid Price Dispersion On Contracting ( Versus Contract Indecision )
1155 WordsAug 30, 20165 Pages
3.3 Effect of Bid Price Dispersion on Contracting (versus Contract Indecision)
Due to the complex nature of IT services and the buyer’s lack of full knowledge of IT services, buyers in online labor markets face value uncertainty over how much to pay for an IT service in general (termed common value uncertainty) and how much to pay for the IT service from a particular freelancer (termed private value uncertainty). Because of the difficulty in assessing a freelancer’s true characteristics (e.g., skills, expertise, capacity, etc.), the buyer cannot precisely estimate the price of a particular freelancer for an IT service given his attributes (private value). However, it is feasible to infer the common value of an IT service based on the…show more content…
Although the average of all freelancers’ bid prices, namely the estimate of the common value, is $80 in both scenarios, the dispersion in scenario (a) is larger than that in scenario (b). In scenario (b), all three freelancers bid a price very close to $80, which delivers a consistent message to the buyer that the common value of the IT service is $80. Hence, the buyer is less uncertain to infer the common value as $80. In scenario (a), however, the three freelancers have very different bid prices, which makes a buyer more uncertain about the common value of the IT service ($80). In sum, a buyer will have higher (lower) common value uncertainty when bid price dispersion is high (low).
We argue that the common value could serve as a practical benchmark to evaluate each freelancer’s bid price and infer how much more or less a buyer should pay a particular freelancer (to overcome private value uncertainty). Using our running example, in Scenario (a), the three bids’ prices ($40, $80, $120) are highly dispersed around the average of $80, and it will be very difficult for a buyer to evaluate any of these bids in terms of how much more or less she would need to pay a particular freelancer. Specifically, the lowest priced freelancer may deliver a low quality service, while the highest priced freelancer would reap the buyer’s potential surplus. In contrast, in Scenario (b) of the running