Indicative bidding: An experimental analysis

Indicative bidding is a practice commonly used in sales of complex and very expensive assets. Theoretical analysis shows that efficient entry is not guaranteed under indicative bidding, since there is no equilibrium in which more qualified bidders are more likely to be selected for the final sale. Furthermore, there exist alternative bid procedures that, in theory at least, guarantee 100% efficiency and higher revenue for the seller. We employ experiments to compare actual performance between indicative bidding and one of these alternative procedures. The data shows that indicative bidding performs as well as the alternative procedure in terms of entry efficiency, while having other characteristics that favor it over the alternative procedure. Our results provide an explanation for the widespread use of indicative bidding despite the potential problem identified in the equilibrium analysis. JEL classification: D4; D44; C92