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Indicative bidding: An experimental analysis

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Author Info

  • Kagel, John
  • Pevnitskaya, Svetlana
  • Ye, Lixin

Abstract

Indicative bidding is a practice commonly used in sales of complex and very expensive assets. Theoretical analysis shows that efficient entry is not guaranteed under indicative bidding, since there is no equilibrium in which more qualified bidders are more likely to be selected for the final sale. Furthermore, there exist alternative bid procedures that, in theory at least, guarantee 100% efficiency and higher revenue for the seller. We employ experiments to compare actual performance between indicative bidding and one of these alternative procedures. The data shows that indicative bidding performs as well as the alternative procedure in terms of entry efficiency, while having other characteristics that favor it over the alternative procedure. Our results provide an explanation for the widespread use of indicative bidding despite the potential problem identified in the equilibrium analysis.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 62 (2008)
Issue (Month): 2 (March)
Pages: 697-721

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Handle: RePEc:eee:gamebe:v:62:y:2008:i:2:p:697-721

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Web page: http://www.elsevier.com/locate/inca/622836

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References

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  1. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
  2. Ye Lixin, 2004. "Optimal Auctions with Endogenous Entry," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-29, October.
  3. Jan Boone & Roy Chen & Jacob Goeree & Angelo Polydoro, 2009. "Risky procurement with an insider bidder," Experimental Economics, Springer, vol. 12(4), pages 417-436, December.
  4. Landsberger, Michael, 2007. "Non-existence of monotone equilibria in games with correlated signals," Journal of Economic Theory, Elsevier, vol. 132(1), pages 119-136, January.
  5. Motty Perry & Elmar G. Wolfstetter & Shmuel Zamir, 2000. "A Sealed-Bid Auction that Matches the English Auction," CESifo Working Paper Series 249, CESifo Group Munich.
  6. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, December.
  8. Boone, Jan & Goeree, Jacob K., 2005. "Optimal Privatization Using Qualifying Auctions," CEPR Discussion Papers 5118, C.E.P.R. Discussion Papers.
  9. Ye, Lixin, 2007. "Indicative bidding and a theory of two-stage auctions," Games and Economic Behavior, Elsevier, vol. 58(1), pages 181-207, January.
  10. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
  11. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  12. Svetlana Pevnitskaya, 2003. "Endogenous Entry in First-Price Private Value Auctions: the Self-Selection Effect," Working Papers 03-03, Ohio State University, Department of Economics.
  13. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-92, June.
  15. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  16. Gal, Shmuel & Landsberger, Michael & Nemirovski, Arkadi, 2007. "Participation in auctions," Games and Economic Behavior, Elsevier, vol. 60(1), pages 75-103, July.
  17. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
  18. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
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Cited by:
  1. Boone, Jan & Goeree, Jacob K., 2005. "Optimal Privatization Using Qualifying Auctions," CEPR Discussion Papers 5118, C.E.P.R. Discussion Papers.
  2. Fan, Cuihong & Wolfstetter, Elmar G., 2006. "Procurement with Costly Bidding, Optimal Shortlisting, and Rebates," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 166, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Marco Casari & John C. Ham & John H. Kagel, 2005. "Selection bias, demographic effects, and ability effects in common value auction experiments," Staff Reports 213, Federal Reserve Bank of New York.
  4. Ham, John C. & Kagel, John H., 2006. "Gender effects in private value auctions," Economics Letters, Elsevier, vol. 92(3), pages 375-382, September.

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