Not an economics buff? Failed Econ 101? That’s fine, we’ve got you covered.
Today, we’re going to explore how our data-driven platform at PERSUIT demonstrates economic theory in real time - and produces some extremely useful insights that can save millions of dollars. How? “Game Theory.”
Here’s your Econ 101 recap: Game theory studies how multiple economic parties (assumed to be rational) interact in a certain situation with ‘rules’ and ‘rewards’ - in a “game,” if you will.
And here’s your PERSUIT 101 recap: Our competitive bidding platform allows multiple firms to offer their services at respective prices to a client, in a predetermined amount of time after an initial RFP process. We call this a “ Reverse Auction .”
What do the games in “Game Theory” and PERSUIT’s “Reverse Auction” have in common? You guessed it (or not, but we’ll tell you) - PERSUIT’s Reverse Auction is an economic ‘game.’ Competing firms are the parties, and they act in certain ways, given the situation.
We wanted to see how these parties act when certain parts of the game change. So we asked some big questions, ran an analysis (big thanks to our in-house data scientist, Isaam!) and here’s what we came up with.
SETTING THE SCENE:
PERSUIT’s Reverse Auction “game” lets a firm compete for a client’s case(s) by adjusting their own price once they see other firms’ positions. We added an option in which the client can choose how a firm sees the competing firms’ positions. A client can choose from the following:
- Each firm’s price is displayed, along with price rank (#1 - lowest).
- Each firm’s price is not displayed, but their price rank is displayed.
- Only the single firm with the lowest price is displayed, along with all firms’ ranks (this is our newest option feature).
We asked, does the display option affect how firms adjust their prices? Specifically:
- Does the option affect the average number of bids that firms make? Does visibility affect how many times a firm will adjust its price for a client?
- Does the option affect the average price drop(%)? Does visibility affect how much the firm will adjust its price for the client?
And why is all of this important? If different options produce different results, we can choose specific options and maximize the amount saved on behalf of the client.
We gathered data from 127 reverse auctions and as it turns out, the option chosen matters - quite a lot.
- 66 out of 127 RA’s showed rank.
- 55 out of 127 showed price.
- 4 out of 127 showed the lowest price.
We adjusted for these numbers to find the averages below.
AVERAGE NUMBER OF BIDS
- When ONLY RANK was visible, the average number of bids was 21.15.
- When PRICE was visible, the average number of bids was 8.3
- When LOWEST PRICE was visible, the average number of bids was 8.5
Price revisions occurred more than 2x, almost 3x as much when ONLY RANK was visible.
AVERAGE PRICE DROP
- When ONLY RANK was visible, the average price drop was 13.58%.
- When PRICE was visible, the average price drop was 12.05%.
- When LOWEST PRICE was visible, the average price drop was 8.14%.
Average price drop was HIGHEST when ONLY RANK was visible. While the sample size is too small to make a definitive claim on the data, it appears that the rank option results in the steepest price drop. And while the percentage differences are slim, this could translate into millions of dollars.
THE BIG PICTURE
These findings are extremely important because they show that pricing behavior may change with visibility. And knowing that there are controls to pricing behavior can result in massive spend reduction. Our research finds that clients consistently pick the firm ranked highest (i.e., the lowest price) on our platform, which means that clients trust they’re getting the best pricing and alignment from running a Reverse Auction. And with this new information, we see that we can deliver them further alignment in potentially predictable ways. We like to give our firms and our clients the tools to best position themselves for success, and this study has added dimension to our efforts.