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Behaviorally Optimal Auction Design: Examples and Observations

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Author Info
Vincent P. Crawford
Tamar Kugler
Zvika Neeman
Ady Pauzner

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Abstract

This paper begins to explore behavioral mechanism design, replacing equilibrium by a model based on "level-k" thinking, which has strong support in experiments. In representative examples, we consider optimal sealed-bid auctions with two symmetric bidders who have independent private values, assuming that the designer knows the distribution of level-k bidders. We show that in a first-price auction, level-k bidding changes the optimal reserve price and often yields expected revenue that exceeds Myerson's (1981) bound; and that an exotic auction that exploits bidders' non-equilibrium beliefs can far exceed the revenue bound. We close with some general observations about level-k auction design. (JEL: C72, C92) (c) 2009 by the European Economic Association.

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Publisher Info
Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 7 (2009)
Issue (Month): 2-3 (04-05)
Pages: 377-387
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Handle: RePEc:tpr:jeurec:v:7:y:2009:i:2-3:p:377-387

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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This page was last updated on 2009-12-12.

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