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Information Effects of Jump Bidding in English Auctions

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  • Dror Lellouche
  • Assaf Romm
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    Abstract

    Should an auctioneer start a rising auction from some starting price or set it as a reservation price? Under what circumstances might a bidder find it rational to raise the current offer by a substantial factor instead of making just a small increase above the highest bid? This paper aims to answer both of these questions by exploring the implications of jump bidding over the information sets available to the bidders. Our motivation is to find whether hiding the information about other players' signals might be beneficial for one of the bidders. We first show that it is better for the auctioneer to set a reservation price rather than "jump" to the starting price. We then prove that in a very general setting and when bidders are risk-neutral there exist no equilibrium with jump bidding (in non-weakly dominated strategies). Finally, we demonstrate that jump bidding might be a rational consequence of risk aversion, and analyze the different effects at work.

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    File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp526.pdf
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    Bibliographic Info

    Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp526.

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    Length: 22 pages
    Date of creation: Dec 2009
    Date of revision:
    Handle: RePEc:huj:dispap:dp526

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    1. Isaac, R. Mark & Salmon, Timothy C. & Zillante, Arthur, 2007. "A theory of jump bidding in ascending auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 144-164, January.
    2. Dodonova, Anna & Khoroshilov, Yuri, 2006. "Jump bidding in takeover auctions," Economics Letters, Elsevier, vol. 92(3), pages 339-341, September.
    3. R. Preston McAfee & John McMillan, 1996. "Analyzing the Airwaves Auction," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 159-175, Winter.
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