We compare first-price auctions to an exchange process that we term 'multilateral negotiations.' In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with privately known costs, and then plays the sellers off one another to obtain additional price concessions. Using the experimental method, we find that with four sellers, transaction prices are statistically indistinguishable in the two institutions, but with two sellers, prices are higher in multilateral negotiations than in first-price auctions. The institutions are equally efficient with two sellers, but multilateral negotiations are slightly more efficient with four sellers.
Thomas, Charles J., and Bart J. Wilson. "A comparison of auctions and multilateral negotiations." RAND Journal of Economics (2002): 140-155.
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This article was originally published in RAND Journal of Economics in 2002.