The Impact of Suppliers’ Overconfidence on the Choice of Auction Formats under Supply Disruption

Supply disruption has been recognized as one of the most important risks of a supply chain and decision-makers are prone to be overconfident in making judgments with uncertainty. In such a situation, we investigate the impact of suppliers’ overconfidence (over-estimation and over-placement) on the buyer’s choice between two widely adopted auction formats, namely, the first-score and second-score. Addressing this problem, we build a reverse auction model where unreliable suppliers are overconfident about their supply probability. For benchmark, we analyze the case when suppliers are cognitively unbiased and show that both auctions generate the same expected payoff for the buyer, and both auctions are socially efficient and optimal. When suppliers are overconfident, we show that the two auctions are not necessarily equivalent and optimal and we give the conditions under which the two reverse auctions are equivalent and socially efficient, i.e., the buyer or a social planner can freely choose either format. We also show that suppliers’ over-estimation and over-placement have different impacts on their bidding strategies and the auction performance, and they have opposite influences on the buyer and suppliers. Ascertaining the impacts of overconfidence on auction performance, our findings help managers choose a better auction format when facing overconfident unreliable suppliers.