Understanding Overbidding in Second Price Auctions: An Experimental Study (original) (raw)

Games, 2011

The paper presents a complete information model of bidding in second price sealed-bid and ascending-bid (English) auctions, in which potential buyers know the unit valuation of other bidders and may spitefully prefer that their rivals earn a lower surplus. Bidders with spiteful preferences should overbid in equilibrium when they know their rival has a higher value than their own, and bidders with a higher value underbid to reciprocate the spiteful overbidding of the lower value bidders. The model also predicts different bidding behavior in second price as compared to ascending-bid auctions. The paper also presents experimental evidence broadly consistent with the model. In the complete information environment, lower value bidders overbid more than higher value bidders, and they overbid more frequently in the second price auction than in the ascending price auction. Overall, the lower value bidder submits bids that exceed value about half the time. These patterns are not found in the incomplete information environment, consistent with the model.

Spite and counter-spite in auctions

2007

Overbidding in Independant Private-Values Auctions and Misperception of Probabilities

2006

We conduct an experiment to test whether probability misperception may be a possible alternative to risk aversion to explain overbidding in independent first-price private-values auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. Yet, when provided with feed-back on the precision of their predictions, subjects learn first to predict their probability of winning correctly, and second to curb-down significantly overbidding. The structural estimation of different behavioral models suggests that i) subjects are heterogenous with respect to risk preferences and probability perceptions, ii) subjects tend to best-respond to their stated beliefs, and iii) although necessary to explain fully behavior, risk aversion appears to play a lesser role than previously believed. Finally, our experimental findings are shown to be consistent with a standard theoretical auction model combining risk aversion and mispercep...

Second-price common value auctions with uncertainty, private and public information: Experimental evidence

Journal of behavioral and experimental economics, 2017

We conduct a laboratory experiment of second-price sealed bid auctions of a common value good with two bidders. Bidders face three different types of information: common uncertainty (unknown information), private information (known by one bidder) and public information (known by both bidders), and auctions differ on the relative importance of these three types of information. We find that subjects barely differentiate between private and public information and deviate from the theoretical predictions with respect to all three types of information. There is under-reaction to both private and public information and systematic overbidding in all auctions above and beyond the standard winner's curse. The Cursed Equilibrium and Level-k models successfully account for some features of the data but others remain largely unexplained.

FIRST-PRICE COMMON VALUE AUCTIONS: BIDDER BEHAVIOR AND THE “WINNER'S CURSE”

Economic Inquiry, 1989

winner's curse in early auction periods as high bidders consistently lose money, failing to account for the adverse selection problem inherent in winning the auction. With experience and bankruptcy on the part of the worst offenders, subjects earn positive average profits, but these are far below Nash equilibrium predictions as a sizable minority of bicis exceed the expected value of the item conditional on having the highest estimate of value. Individual bidding behavior is explored to identifr the mechanism whereby market outcomes no longer display the worst effects of the winner's curse.

On the impact of low-balling: Experimental results in asymmetric auctions

International Journal of Game Theory, 2002

The paper reports on a series of asymmetric auction experiments with private-independent values and two buyers. Maskin and Riley (2000) showed, under some conditions, that if one buyer has a greater probability than the other of not being able to bid, first-price auctions could yield lower revenues to the seller than second-price auctions. The data rejected this prediction because of an important overbidding when subjects received low values in firstprice auctions. In this asymmetric setting, the observed overbidding cannot be explained by the usual risk aversion hypothesis and the detection of a learning pattern indicates that subjects used more an adaptive behaviour than a static one. An ad hoc bidding strategy for the buyers who are the most likely to bid explains the observed low bids better than the risk neutral equilibrium strategy. Finally, as subjects appear to have bid in equilibrium as if there were two other competitors instead of only one, their bidding behaviour can be thought to have displayed an over anxiousness about winning.

The nature of information and its effect on bidding behavior: Laboratory evidence in a first price common value auction

Journal of Economic Behavior & Organization, 2015

We study in the laboratory a series of first price sealed bid auctions of a common value good. Bidders face three types of information: private information, public information and common uncertainty. Auctions are characterized by the relative size of these three information elements. Only half of our subjects bid differently depending on whether the last piece of information obtained is private or public but they do not react to each type of information as predicted by theory. The other half of the subjects do not distinguish between private and public information and either consistently underbid or consistently overbid.

Bidding behavior in asymmetric auctions: An experimental study

European Economic Review, 2005

We review an asymmetric auction experiment. Based on Plum (1992) private valuations of the two bidders are independently drawn from distinct but commonly known distributions, one of which stochastically dominating the other. We test the qualitative properties of that model of asymmetric auctions, in particular whether the weak bidder behaves more aggressively than the strong and then test bidders' preference for …rst-vs. second-price auctions.

Competition strength influences individual preferences in an auction game

Cognition, 2014

Competitive interactions between individuals are ubiquitous in human societies. Auctions represent an institutionalized context for these interactions, a context where individuals frequently make non-optimal decisions. In particular, competition in auctions can lead to overbidding, resulting in the so-called winner's curse, often explained by invoking emotional arousal. In this study, we investigated an alternative possibility, namely that competitors' bids are construed as a source of information about the good's common value thereby influencing an individuals' private value estimate. We tested this hypothesis by asking participants to bid in a repeated all-pay auction game for five different real items. Crucially, participants had to rank the auction items for their preference before and after the experiment. We observed a clear relation between auction dynamics and preference change. We found that low competition reduced preference while high competition increased preference. Our findings support a view that competitors' bids in auction games are perceived as valid social signal for the common value of an item. We suggest that this influence of social information constitutes a major cause for the frequently observed deviations from optimality in auctions.

Understanding Overbidding in Second Price Auctions: An Experimental Study (original) (raw)

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