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Entry into auctions: An experimental analysis

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  • Ertaç, Seda
  • Hortaçsu, Ali
  • Roberts, James W.

Abstract

This paper investigates entry decisions into first and second-price auctions using an experimental design to extract information on willingness-to-pay to enter (WTE). We find that subjects tend to overpay to enter both auction formats. In particular, if the subjects believe they will be bidding against bidders following the risk-neutral Nash strategy, their WTE is greater than the optimal risk-neutral amount 97% of the time for first-price auctions (FPA) and 90% for second-price auctions (SPA). If they believe that they are bidding against subjects who bid as do the other subjects, they submit a WTE that is too high 92% of the time for FPA and 69% of the time for SPA. We also find, in line with previous studies, significant overbidding in both the FPA and SPA. We then investigate whether introducing risk aversion (RA) or "joy of winning" (JOY) can explain the joint observation of over-entry and overbidding. In particular, using bid data alone, we structurally estimate three models, one allowing RA only, one allowing for JOY only and one allowing for both RA and JOY. While a model with JOY alone overestimates WTE, we find that RA alone can explain 38% of WTE but a model with both RA and JOY (where RA is estimated using FPA bids, and JOY is estimated using SPA bids) can explain 65% of WTE. Moreover, JOY appears to explain nearly all of the male WTE but only 44% of the female WTE.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 2 (March)
Pages: 168-178

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Handle: RePEc:eee:indorg:v:29:y:2011:i:2:p:168-178

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Laboratory experiment Entry Auctions Risk aversion Joy of winning Gender;

References

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  1. James Andreoni & Yeon-Koo Che & Jinwoo Kim, 2006. "Asymmetric information about rivals' types in standard auctions: An experiment," Discussion Papers 0506-27, Columbia University, Department of Economics.
  2. Bohnet, Iris & Kübler, Dorothea, 2000. "Compensating the cooperators: Is sorting in the prisoner's dilemma possible?," SFB 373 Discussion Papers 2001,2, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  11. James W. Roberts & Andrew Sweeting, 2010. "Bailouts and the Preservation of Competition," NBER Working Papers 16650, National Bureau of Economic Research, Inc.
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  14. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  15. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2008. "Robustness Of Bidder Preferences Among Auction Institutions," Economic Inquiry, Western Economic Association International, vol. 46(3), pages 355-368, 07.
  16. David J. Cooper & Hanming Fang, 2006. "Understanding Overbidding in Second Price Auctions: An Experimental Study," Cowles Foundation Discussion Papers 1557, Cowles Foundation for Research in Economics, Yale University.
  17. Emel Filiz-Ozbay & Erkut Y. Ozbay, 2007. "Auctions with Anticipated Regret: Theory and Experiment," American Economic Review, American Economic Association, vol. 97(4), pages 1407-1418, September.
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  21. Tor Eriksson & Sabrina Teyssier & Marie-Claire Villeval, 2006. "Effort Self-Selection and the Efficiency of Tournaments," Post-Print halshs-00142876, HAL.
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Cited by:
  1. Qiang Fu & Changxia Ke & Fangfang Tan, 2013. ""Success breeds success" or "Pride goes before a fall"? Teams and Individuals in Best-of-Three Contests," Working Papers tax-mpg-rps-2013-06, Max Planck Institute for Tax Law and Public Finance.
  2. Seda Ertac & Mehmet Y. Gurdal, 2013. "Preference Communication and Leadership in Group Decision-Making," Koç University-TUSIAD Economic Research Forum Working Papers 1324, Koc University-TUSIAD Economic Research Forum.

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