Responsibility for Cost Management Hinders Learning to Avoid the Winner's Curse

Abstract

Errors in estimated product costs lead firms to win business that is unprofitable, because firms are more likely to win business when underestimated product costs lead them to bid below actual cost (Cooper et al. 1992; Hilton 2005). Feedback from repeated competitive bidding markets can teach people to bid well above estimated costs to avoid this winner's curse (Kagel 1995; Kagel and Levin 2002). We present experimental evidence that such learning is substantially hampered by sellers' sense of responsibility for the costs. This effect is consistent with psychological evidence that people tend to attribute bad outcomes to environmental factors out of their control, such as cost-estimation errors, and attribute good outcomes to their own skills, such as their ability to choose effective cost-management initiatives (Miller and Ross 1975; Zuckerman 1979). The results suggest that responsibility structures that combine pricing and production decisions may have unexpected drawbacks.