A Comparison of Auctions and Multilateral Negotiations

We compare the well-known first-price auction with a common but previously unexamined exchange process that we term “multilateral negotiations.” In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with heterogeneous costs, and then plays the sellers off one another to obtain additional price concessions. Using experimental methods, we find that transaction prices are statistically indistinguishable in the two institutions with a sufficiently large number of sellers, but that prices are higher in multilateral negotiations than in first-price auctions as the number of sellers decreases. With fewer sellers, the institutions are equally efficient, but with more sellers, there is some evidence that multilateral negotiations are slightly more efficient. * We thank Jeremy Bulow, Jim Cox, Vernon Smith, Todd Swarthout, and Keith Waehrer for helpful comments. We also thank the Economic Science Laboratory at the University of Arizona for providing financial support, and Todd Swarthout for skillfully writing the software. The data and a demonstration copy of the instructions and software are available upon request. This work is not intended to represent the position of the Federal Trade Commission or any individual Commissioner. JEL: C78, D44, C9, L14, L40