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The Effect of Regret on Optimal Bidding in Auctions

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  • Richard Engelbrecht-Wiggans

    (Department of Business Administration, University of Illinois, 1206 South Sixth Street, Champaign, Illinois 61820)

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    Abstract

    While most models of auctions and competitive bidding assume that each bidder's utility for an outcome depends only on his own profit, we allow the utility to also depend on any regret that a bidder suffers after the fact and characterize when and how this affects bidding. Specifically, a winner might regret "money left on the table" in Federal offshore oil lease sales, while a loser might regret seeing an object sell for less than his own value for it. We show that for risk-neutral bidders who, after the fact, know the winner's price for the object, a bidder's optimal bidding strategy will not depend on the relative weight given to profit versus regret if both forms of regret weigh equally heavily. However, if bidders weight money-left-on-the-table regret more heavily, then the bid taker suffers. Likewise, if losers do not learn the winner's price, then the bid taker also suffers. Thus, the existing models' exclusion of regret from risk neutral bidders' utility functions affects the applicability of the resulting theory under certain, now clearly delineated, conditions.

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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 35 (1989)
    Issue (Month): 6 (June)
    Pages: 685-692

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    Handle: RePEc:inm:ormnsc:v:35:y:1989:i:6:p:685-692

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    Keywords: auctions; competitive bidding; regret; money left on the table;

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    Cited by:
    1. Elizabeth Watson & Theodore L. Turocy, 2011. "Reservation values and regret in laboratory first price auctions: Context and bidding behavior," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 11-14, School of Economics, University of East Anglia, Norwich, UK..
    2. Filiz-Ozbay, Emel & Ozbay, Erkut Y., 2010. "Anticipated loser regret in third price auctions," Economics Letters, Elsevier, vol. 107(2), pages 217-219, May.
    3. Wei Lim & Joo Lee-Partridge & Soo Tan, 2008. "Revenue implication of auction value in k-price sealed-bid auctions: An experimental study," Marketing Letters, Springer, vol. 19(1), pages 25-38, March.
    4. Todd R. Kaplan & Shmuel Zamir, 2014. "Advances in Auctions," Discussion Paper Series dp662, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    5. Baye, Michael R. & Kovenock, Dan & Vries, Casper G. de, 2009. "Contests with rank-order spillovers," Discussion Papers, Research Unit: Market Processes and Governance SP II 2009-09, Social Science Research Center Berlin (WZB).
    6. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2007.
    7. Amar Cheema & Peter Leszczyc & Rajesh Bagchi & Richard Bagozzi & James Cox & Utpal Dholakia & Eric Greenleaf & Amit Pazgal & Michael Rothkopf & Michael Shen & Shyam Sunder & Robert Zeithammer, 2005. "Economics, Psychology, and Social Dynamics of Consumer Bidding in Auctions," Marketing Letters, Springer, vol. 16(3), pages 401-413, December.
    8. Richard Engelbrecht-Wiggans & John A. List & David H. Reiley, 2005. "Demand Reduction in Multi-Unit Auctions: Evidence from a Sportscard Field Experiment: Reply," American Economic Review, American Economic Association, vol. 95(1), pages 472-476, March.
    9. Anna Dodonova & Yuri Khoroshilov, 2009. "Behavioral biases in auctions: an experimental study," Economics Bulletin, AccessEcon, vol. 29(3), pages 2218-2226.
    10. Andreas Roider & Patrick W. Schmitz, 2012. "Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 808-830, 09.
    11. Andrés Romeu, 2011. "Cluster Detection in Laboratory Auction Data: A Model-Based Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 473-488, December.
    12. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.

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