The Role of Auction Parameters in Online Outsourcing Platforms for Service Procurement

This research shows that auction duration and description are two essential auction design parameters that function as screening mechanisms for bidder quality on popular online outsourcing platforms that use buyer-determined reverse auctions in order to find service providers. Using data from a major online outsourcing platform that connects buyers with information technology (IT) service vendors, we examine the effects of the description and duration of auctions on both bidder entry (i.e., number of bids, bidder quality, bidding price) and contracting decisions (i.e., whether a project is awarded, the quality of the chosen winner, and whether project is completed). Our empirical analyses show that auctions with longer durations and descriptions attract more bids (i.e., higher quantity of bidders), but they also attract more low-quality bidders with lower win rates and lower completion rates (i.e., lower quality of bidders), which creates a double whammy situation, leading not only to higher evaluation costs (due to more bids) but also to an adverse-selection environment (due to more low-quality bidders), which in turn results in a lower probability of successful contracting and completion of IT-service projects. Our research provides empirical evidence demonstrating that auction design parameters like auction duration and auction description could potentially serve as screening mechanisms for online outsourcing platforms for service procurement