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Dominant Strategy Adoption and Bidders' Experience with Pricing Rules

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  • Ronald Harstad

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Abstract

Truthful revelation is a dominant strategy in both English (oral ascending bid) and second-price sealed-bid private-values auctions. Controlled observations of English auctions are largely consistent with the dominant strategy prediction, but laboratory second-price auctions exhibit substantial and persistent overbidding, even with prior experience. However, the experience of having bid in an English auction has a significant learning effect, moving bidding in subsequent second-price auctions closer to the dominant strategy. I explore two treatments isolating facets of the lessons learned from English auction participation, leading me to the following conclusions. Part of the lesson carried over appears to be considering prices one-by-one, but most of it appears to be a crude awareness that overbidding leads to losses. A claim that English auction experience teaches subjects to recognize the dominant strategy in second-price auctions seems overly optimistic. I introduce a nonparametric technique to test coefficient restrictions when the assumption of normally distributed errors is untenable. Copyright Kluwer Academic Publishers 2000

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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 3 (2000)
Issue (Month): 3 (December)
Pages: 261-280

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Handle: RePEc:kap:expeco:v:3:y:2000:i:3:p:261-280

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Web page: http://www.springerlink.com/link.asp?id=102888

Related research

Keywords: auctions; experiments; dominant strategy; nonparametric coefficient; restriction test;

References

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  1. Vijay Krishna & Robert Rosenthal, 1995. "Simultaneous Auctions with Synergies," Papers 0056, Boston University - Industry Studies Programme.
  2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
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  6. Kagel, John H & Harstad, Ronald M & Levin, Dan, 1987. "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica, Econometric Society, vol. 55(6), pages 1275-1304, November.
  7. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
  8. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  9. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, vol. 8(1), pages 164-212.
  10. Pezanis-Christou, P, 1997. "On the Impact of Low-Balling : Experimental Results in Asymmetric Auctions," Papers 97/05, New South Wales - School of Economics.
  11. Gale, John & Binmore, Kenneth G. & Samuelson, Larry, 1995. "Learning to be imperfect: The ultimatum game," Games and Economic Behavior, Elsevier, vol. 8(1), pages 56-90.
  12. Harrison, Glenn W, 1994. "Expected Utility Theory and the Experimentalists," Empirical Economics, Springer, vol. 19(2), pages 223-53.
  13. Harrison, Glen W. & Ronald M. Harstad & E. Elisabet Rutström, 1995. "Experimental Methods and Elicitation of Values," Discussion Paper Serie B 349, University of Bonn, Germany.
  14. A. Roth & I. Er’ev, 2010. "Learning in Extensive Form Games: Experimental Data and Simple Dynamic Models in the Intermediate Run," Levine's Working Paper Archive 387, David K. Levine.
  15. Michael H. Rothkopf & Ronald M. Harstad, 1994. "Modeling Competitive Bidding: A Critical Essay," Management Science, INFORMS, vol. 40(3), pages 364-384, March.
  16. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
  17. repec:att:wimass:9325 is not listed on IDEAS
  18. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
  19. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
  20. Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
  21. Harstad, Ronald M. & Marrese, Michael, 1982. "Behavioral explanations of efficient public good allocations," Journal of Public Economics, Elsevier, vol. 19(3), pages 367-383, December.
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