Abstract
Online labor markets are web-based platforms that enable buyers to identify and contract for IT services with service providers using Buyer-Determined (BD) auctions. BD auctions in online labor markets either follow an open or a sealed bid format. We compare open and sealed bid auctions in online labor markets to identify which format is superior in terms of obtaining more bids and a higher buyer surplus. Our theoretical analysis suggests that the relative advantage of open versus sealed bid auctions hinges on the role of reducing service providers’ valuation uncertainty (difficulty in assessing the cost to execute a project) and competition uncertainty (difficulty in assessing the intensity of the competition from other service providers), which largely depends on the relative importance of the common value (versus the private value) component of the auctioned IT services, calling for an empirical investigation to compare open and sealed bid auctions. Based on a unique dataset of 71,437 open bid auctions and 7,499 sealed bid auctions posted by 21,799 buyers at a leading online labor market, we find that, an average, albeit sealed bid auctions attract 18.4% more bids, open bid auctions offer buyers $10.87 higher surplus. Furthermore, open bid auctions are 55.3% more likely to result in a buyer’s selection of a certain service provider, 22.1% more likely to reach a contract (conditional on the buyer’s making a selection) with a provider, and they generate higher buyer satisfaction. In contrast to conventional wisdom that “the more bids the better” and industry practice of treating sealed bid auctions as a premium feature, our results suggest that the buyer surplus gained from the reduction in valuation uncertainty enabled by open bid auctions outweighs the buyer surplus gained from the higher competition uncertainty in sealed bid auctions, which renders open bid auctions a superior auction design in online labor markets.