INDIVIDUAL BEHAVIOR AND BIDDING HETEROGENEITY IN SEALED BID AUCTIONS WHERE THE NUMBER OF BIDDERS IS UNKNOWN

This article uses laboratory data from a series of first‐price (FP) and second‐price (SP) sealed bid auctions in which the number of bidders is unknown to test for possible deviations of individual behavior from theory and study the source of heterogeneity in bidding. In SP auctions we find a substantial amount of coincidence with theory. We observe systematic deviations from risk neutral bidding in FP auctions and show theoretically that these deviations are consistent with risk averse preferences. We find essentially no heterogeneity in bidding in SP auctions where risk preferences and the number of bidders do not affect the optimal bid, while in the FP auctions heterogeneity in bidding persists with experience. We find that heterogeneity in bidding in FP auctions is consistent with heterogeneity in risk preferences, the attempt to count the number of bidders in the auction, and bidder specific noise. (JEL D44, C91)     

AUCTIONS WITH RESALE OPPORTUNITIES: AN EXPERIMENTAL STUDY

We study first price asymmetric private value auctions with resale opportunities presented in seller's and buyer's markets. We offer experimental evidence on bidding behavior, prices, and resource allocation. Building upon the Hafalir and Krishna (2008) model, we find that bidders will bid higher in an auction if the resale market is a seller's market than a buyer's market. There is a price/revenue‐efficiency trade‐off established theoretically between these two resale regimes. In equilibrium, however, final efficiency is high irrespective of the resale market structure. Evidence of bid symmetrization and higher final efficiency is found in the buyer‐advantaged resale case. (JEL D44, C92)     

SOME EVIDENCE ON LATE BIDDING IN EBAY AUCTIONS

Bidding in the last seconds or minutes of an auction is a common strategy in Internet auctions with fixed end‐time. This paper examines the three explanations of late bidding in eBay auctions that survived the first scrutiny in Roth and Ockenfels (2002) . There is no indication that late bidding could lead to collusive gains for bidders. Late bidding is a strategic response to the presence of bidders placing multiple bids. Experts protecting their private information are typically the last to bid, while collectors are often the first. As bidders gain familiarity with eBay rules, they tend to bid slightly earlier. (JEL D44)     

SELECTION INTO AUCTIONS FOR RISKY AND AMBIGUOUS PROSPECTS

We study experimentally the selection into first‐price sealed‐bid auctions for a risky or an ambiguous prospect. Most subjects chose to submit a bid for the risky prospect, leading to thinner markets for the ambiguous prospect. Transaction prices for both prospects were equal although subjects expected the ambiguous markets to be smaller. Evidence of a positive correlation between risk and ambiguity aversion suggests that the ambiguous markets were populated by relatively risk tolerant bidders. A control experiment with selection in a simple choice task shows that subjects correctly anticipate the effects of selection on market size and risk attitudes. (JEL C91, D44, D81)     

RISK AVERSION AND OVERBIDDING IN FIRST PRICE SEALED BID AUCTIONS: NEW EXPERIMENTAL EVIDENCE

Bidding above the risk‐neutral Nash equilibrium in first price sealed bid auctions has traditionally been ascribed to risk aversion. Later studies, however, offer other explanations and even argue that risk aversion plays no or a minor role. In a novel experimental design, we directly test the relationship between risk aversion and overbidding by systematically varying the distribution of risk attitudes in auction markets. We find a significant relationship between our measure of risk aversion and overbidding. (JEL D44, C91)     

A LABORATORY STUDY OF AUCTIONS WITH A BUY PRICE

We present a series of laboratory experiments that examine auctions with buy prices, which are prices that allow a bidder to stop the auction and buy the item immediately. Two types of buy prices are considered, one that is available throughout the auction and one that disappears with an initial bid. Both are evaluated with and without proxy bidding. We find that the use of a buy price increases revenue, early bidding, and auction efficiency. Differences between outcomes in auctions with permanent and temporary buy prices are consistent with the observed choices in auction design made by online auction sites. (JEL C90, D44, C70, L81)     

THE ROLE OF THE BIDDING PROCESS IN PRICE DETERMINATION: JUMP BIDDING IN SEQUENTIAL ENGLISH AUCTIONS

This paper uses data collected from a series of public auctions of used cars in New Jersey to examine how strategic bidding affects price determination in open‐outcry English auctions. “Jumps” in the bidding, which occur when a new offer exceeds the old offer by more than the minimum bid increment, are highly pervasive and consistently related to the item’s presale estimated price. The size of the jumps is not affected by the selling order, however. This jump bidding pattern suggests that open‐outcry auctions are more appropriately interpreted with models that assume common‐item valuations rather than models assuming private valuations. (JEL D44)     

DESIGNED TO FAIL: THE MEDICARE AUCTION FOR DURABLE MEDICAL EQUIPMENT

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high‐cost firms potentially displace low‐cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median‐price auction with the standard clearing‐price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. (JEL D44, I11, H57)     

CAPACITY CONSTRAINTS AND INFORMATION REVELATION IN PROCUREMENT AUCTIONS

We utilize laboratory experiments to study behavior in sequential procurement auctions where winning an auction round increases a bidder's future costs. The game admits competitive as well as bid‐rotation style collusive equilibria. We find that (a) bidders show some propensity to account for the opportunity cost of winning an auction, but underestimate its magnitude; (b) revealing all bids (instead of only the winning bid) after each round leads to dramatically higher procurement costs. The rise in procurement costs is accompanied by an increase in very high (extreme) bids, a fraction of which appear to be collusive in nature. (JEL C91, D44, L44)     

ROBUSTNESS OF BIDDER PREFERENCES AMONG AUCTION INSTITUTIONS

In previous work, we found that bidders strongly prefer the ascending to the first‐price sealed‐bid auction on a ceteris paribus basis, but perhaps surprisingly, they are not willing to pay up to an entry price for the ascending auction that would equalize the profits. Risk aversion was proposed as an explanation. In this study, we examine two alternative explanations for the observed behavior: loss aversion and aversion to the dynamic bidding process. We find that neither alternative explanation can account for bidders’ auction choice behavior, leaving risk aversion as the only unfalsified hypothesis. (JEL C91, D44)     

THE BEHAVIOR OF INEXPERIENCED BIDDERS IN INTERNET AUCTIONS

In Internet auctions, bidders alter their strategies as they gain market experience. While inexperienced bidders bid the same high amounts regardless of the seller’s reputation, experienced bidders bid substantially less if the seller has yet to establish a reputation and raise their bids as reports are filed that the seller has treated bidders well in the past. Experienced bidders also wait until much closer to the end of the auction to place their bids, although it takes very little experience to learn that waiting to submit one’s bid is a superior strategy. (JEL L14, L15, D83, D12)     

RESERVE PRICE EFFECTS IN AUCTIONS: ESTIMATES FROM MULTIPLE REGRESSION‐DISCONTINUITY DESIGNS

We present evidence from 260,000 online auctions of second‐hand cars to identify the impact of public reserve prices on auction outcomes. We exploit multiple discontinuities in the relationship between reserve prices and vehicle characteristics to present causal regression‐discontinuity estimates of reserve price impacts. We find an increase in reserve price decreases the number of bidders, increases the likelihood the object remains unsold, and increases expected revenue conditional on sale. We then combine these estimates to calibrate the reserve price effect on the auctioneer's ex ante expected revenue. This reveals the auctioneer's reserve price policy to be locally optimal. (JEL D44, L11, L62)     

OUTPUT EFFECTS OF INFLATION WITH FIXED PRICE– AND QUANTITY–ADJUSTMENT COSTS

This article examines how the aggregate production varies with inflation when there are fixed price– and quantity–adjustment costs. It shows that such variation is determined by the elasticity of the firms’ marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log‐quadratic utility function. (JEL E31)     

EXPERIMENTAL COMPARISONS OF AUCTIONS UNDER SINGLE-AND MULTI-UNIT DEMAND

An English clock auction and a sealed-bid auction with lowest accepted-bid pricing are studied in a controlled laboratory setting. Buyers bid for either a single unit or two units of the good. The sealed-bid auction generates more revenue than the English clock auction in both cases. The revenue from the English clock auction is lower in the two-unit demand environment than in the single-unit demand environment, due to strategic demand reduction on the part of bidders. (JEL C92, D44)     

ALL‐PAY AUCTIONS WITH A BUY‐PRICE OPTION

This paper studies all‐pay auctions in which there is a buy‐price option for bidders to guarantee purchases at a seller‐specified price. We analyze symmetric increasing bidding equilibria in the first‐ and second‐price all‐pay auctions with the buy‐price option. While the optimal buy‐price in the second price is higher than are those in the first‐price all‐pay auction, both formats maintain the same expected profit. With an endogenous entry process, all‐pay auctions with the buy‐price can attract more consumers and ultimately reach a higher expected profit than does the uniform posted‐price selling mechanism. (JEL D44, L11, L81)     

Bidder Preferences among Auction Institutions

This study examines bidder preferences between alternative auction institutions. We seek to characterize experimentally the degree to which bidders prefer an ascending auction to a sealed bid auction. We find very strong ceteris paribus preferences for the ascending institution with bidders choosing it overwhelmingly often when entry prices for the two auctions are the same. When the entry prices of the two auctions differ, many subjects can be shown to be willing to pay more to enter the ascending auction than is explainable by their risk attitudes when accounting for their expectations about the risk preferences of their opponents. (JEL C91 , D44 )     

Anchoring effects in an experimental auction – Are farmers anchored?

Auctioning goods is a widespread practice, particularly in the agricultural sector. The outcome of auctions can be affected by various factors. One of these factors can be anchoring effects, which describe the influence of present available information on numerical values in human decisions. However, the influence of anchoring effects in auctions carried out offline – that is, live events that are not taking place on the internet – is largely unknown. For this reason, we analyze anchoring effects of exogenously provided values using an experimental common value auction with entrepreneurs. In total, 48 groups each made of five farmers participate in a series of four auctions for envelopes containing a €10 banknote with a 50% probability of occurrence. Our results indicate that anchoring based on exogenously presented values can either result in negative adjustment in open bid auctions, or no adjustment in closed-seal bid auctions. Furthermore, the results show that previous bids affect following bids, which may also be an anchoring effect.     

Groves sealed bid auctions of heterogeneous objects with fair prices

We study the allocation of heterogeneous indivisible objects to agents whose valuations of the objects depend on what other objects they are obtained with. We apply the envyfree criterion to Groves sealed bid auctions, which are value maximizing and dominant strategy incentive compatible for this multi-object allocation problem. First we show that if valuations are unrestricted then there is no Groves auction which ensures that the allocation is always envyfree. We obtain a positive result, however, if the valuations of the objects are superadditive, and give a complete characterization of Groves prices that guarantee envyfreeness for superadditive valuations. Received: 25 April 2001/Accepted: 3 April 2002 I would like to thank Kim Border, Tom Palfrey, and especially John Ledyard for their comments. Special thanks are due to Katya Sherstyuk. Support from a Sloan Dissertation Fellowship is gratefully acknowledged.     

THE CHALLENGE OF REVENUE SHARING WITH BUNDLED PRICING: AN APPLICATION TO MUSIC

Although bundling can substantially increase profits relative to standalone pricing, particularly for zero‐marginal‐cost information products, it has one major problem: bundling produces revenue that is not readily attributable to particular pieces of intellectual property, creating a revenue division problem. We evaluate several possible solutions using unique song valuation survey data. We find the Shapley value, a well‐motivated theoretical solution, is universally incentive compatible (all bundle elements fare better inside the bundle than under standalone pricing), but revenue‐sharing schemes feasible with readily available consumption data are not. Among feasible schemes, Ginsburgh and Zang's modified Shapley value performs best. (JEL C71, D79, L14)     

DEBT BAILOUTS AND CONSTITUTIONS

A demand‐based theory of subnational debt bailouts is presented. It is shown that demand for bailouts among politicians with regional constituencies is affected by revenue sharing arrangements as a bailout implies a shift of taxation toward the federal tier. Automatic revenue sharing may lead to the formation of pro‐bailout coalitions formed by indebted states and states that are net recipients of the revenue sharing arrangement. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were consistent with politicians who maximize the proceeds accruing to their constituencies. (JEL H70, D70)