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The Common-Probability Auction Puzzle

Author

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  • M. Kathleen Ngangoue
  • Andrew Schotter

Abstract

This paper presents a puzzle in the behavior of experimental subjects in what we call common-probability auctions. In common-value auctions, uncertainty is defined over values, while in common-probability auctions, uncertainty is defined over probabilities. We find that in contrast to the substantial overbidding found in common-value auctions, bidding in strategically equivalent common-probability auctions is consistent with Nash equilibrium. To explain our results, we run treatments to identify whether this difference stems from the way subjects estimate the good's value in a competitive environment rather than the way they bid conditional on these valuations. We conclude it is the former.

Suggested Citation

  • M. Kathleen Ngangoue & Andrew Schotter, 2023. "The Common-Probability Auction Puzzle," American Economic Review, American Economic Association, vol. 113(6), pages 1572-1599, June.
    • Handle: RePEc:aea:aecrev:v:113:y:2023:i:6:p:1572-99
    DOI: 10.1257/aer.20191927
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    Cited by:

    1. Eissa, Yasmine & Rosmer, Paul & Yap, Luther, 2023. "A Comment on The Common-Probability Auction Puzzle (2023)," I4R Discussion Paper Series 74, The Institute for Replication (I4R).

    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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