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A model of descending auction with hidden starting price and endogenous price decrease

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  • Di Gaetano, Luigi

Abstract

Several new auction formats are spreading over the Internet. They have usually the aim of raising revenues by increasing the number of participant, who will pay a participation fee, rather than selling the object at the highest possible price. The aim of this paper is to study a format of descending price auction with hidden starting price and endogenous price decrease. In this format, usually known as price reveal auction, the price is hidden and players have to pay a fee to observe it. The price decreases only if a bidder observes it and not because of the time, like in the usual Dutch format. In the following pages, we will analyse the effect of the concealment of the price in a standard Dutch auction. We will, then, define a model for price reveal auction, and analyse its most important aspects. We will, finally, derive players' best strategy and the Nash equilibrium of the game. Our result is that players use a threshold strategy to decide whether or not participate the auction (observe the price and pay the fixed fee). However, in our model there is not a separating equilibrium. Moreover, we will find that there is a process of beliefs updating, which takes account of the time as a signal of the price. Therefore, if the game continues, players infer that the price is too high and update their beliefs accordingly. We will finally compare our theoretical results with empirical data about 135 price reveal auctions held between December 2009 and April 2011 on the website Bidster.com.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35773.

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Date of creation: 01 Oct 2011
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Handle: RePEc:pra:mprapa:35773

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Keywords: Price reveal auction; Endogenous price; Descending auction;

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References

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  1. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  2. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Economics Series Working Papers 1999-W12, University of Oxford, Department of Economics.
  3. Andrea Gallice, 2010. "Price Reveal Auctions on the Internet," Carlo Alberto Notebooks 147, Collegio Carlo Alberto.
  4. Paulo K. Monteiro & Flavio M. Menezes, 2000. "original papers : Auctions with endogenous participation," Review of Economic Design, Springer, vol. 5(1), pages 71-89.
  5. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  6. Chakraborty, Indranil & Kosmopoulou, Georgia, 2001. "Auctions with endogenous entry," Economics Letters, Elsevier, vol. 72(2), pages 195-200, August.
  7. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  8. J├╝rgen Eichberger & Dmitri Vinogradov, 2008. "Least Unmatched Price Auctions: A First Approach," Working Papers 0471, University of Heidelberg, Department of Economics, revised Jul 2008.
  9. Harold Houba & Dinard van der Laan & Dirk Veldhuizen, 2008. "The Unique-lowest Sealed-bid Auction," Tinbergen Institute Discussion Papers 08-049/1, Tinbergen Institute.
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Cited by:
  1. Toomas Hinnosaar, 2013. "Penny Auctions are Unpredictable," Carlo Alberto Notebooks 305, Collegio Carlo Alberto.

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