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Understanding Overbidding in Second Price Auctions: An Experimental Study

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Abstract

This paper presents results from a series of second price private value auction (SPA) experiments in which bidders are either given for free, or are allowed to purchase, noisy signals about their opponents' value. Even though theoretically such information about opponents' value has no strategic use in the SPA, it provides us with a convenient instrument to change bidders' perception about the "strength" (i.e., the value) of their opponent. We argue that the empirical relationship between the incidence and magnitude of overbidding and bidders' perception of the strength of their opponent provides the key to understand whether overbidding in second price auctions are driven by "spite" motives or by the "joy of winning." The experimental data show that bidders are much more likely to overbid, though less likely to submit large overbid, when they perceive their rivals to have similar values as their own. We argue that this empirical relationship is more consistent with a modified "joy of winning" hypothesis than with the "spite" hypothesis. However, neither of the non-standard preference explanations are able to fully explain all aspects of the experimental data, and we argue for the important role of bounded rationality. We also find that bidder heterogeneity plays an important role in explaining their bidding behavior.

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File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1557.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1557.

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Length: 51 pages
Date of creation: Jan 2006
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Publication status: Published in Economic Journal (October 2008), 118: 1572-1595
Handle: RePEc:cwl:cwldpp:1557

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Overbidding; Second price auctions; Spite; Joy of winning; Bounded rationality;

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  1. Andreoni, James & Che, Yeon-Koo & Kim, Jinwoo, 2007. "Asymmetric information about rivals' types in standard auctions: An experiment," Games and Economic Behavior, Elsevier, vol. 59(2), pages 240-259, May.
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