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Outside options: Another reason to choose the first-price auction

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  • Oliver Kirchkamp,
  • Eva Poen,
  • Philipp Reiß

Abstract

In this paper we derive equilibrium bidding functions for first-price and second-price auctions with private values when bidders have outside options. We then study bidding behaviour with the help of experiments. We find that bidders respond to outside options and to variations of common knowledge about competitors’ outside options, though bidders in first-price auctions show more overbidding with outside options than without. In second-price auctions overbidding is not affected by outside options. As expected first-price auctions yield more revenue than second-price auctions. This revenue-premium is higher in the presence of outside options.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0605.

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Date of creation: Jun 2006
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Handle: RePEc:san:crieff:0605

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Keywords: Auction; Experiment; Outside Option;

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References

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  1. Kirchkamp, Oliver & Moldovanu, Benny, 2000. "An experimental analysis of auctions with interdependent valuations," Sonderforschungsbereich 504 Publications 00-10, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  2. Todd L. Cherry & Peter Frykblom & John List & Jason Shogren & Melonie Williams, 2002. "Laboratory Testbeds and Nonmarket Valuation: The Case of Bidding Behavior in a Second Price Auction with an Outside Option," Working Papers 02-13, Department of Economics, Appalachian State University.
  3. Paul Pezanis-Christou & Abdolkarim Sadrieh, 2003. "Elicited bid functions in (a)symmetric first-price auctions," UFAE and IAE Working Papers 578.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Oliver Kirchkamp & J. Philipp Reiß & Abdolkarim Sadrieh, 2008. "A pure variation of risk in first-price auctions," Jena Economic Research Papers 2008-024, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  5. Isaac, R. Mark & Walker, James M., 1985. "Information and conspiracy in sealed bid auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 6(2), pages 139-159, June.
  6. Kathryn Graddy & Orley Ashenfelter, 2002. "Auctions and the Price of Art," Economics Series Working Papers 131, University of Oxford, Department of Economics.
  7. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-45, June.
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  15. Guth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2005. "Bidding behavior in asymmetric auctions: An experimental study," European Economic Review, Elsevier, vol. 49(7), pages 1891-1913, October.
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  18. Brosig, Jeannette & Rei[ss], J. Philipp, 2007. "Entry decisions and bidding behavior in sequential first-price procurement auctions: An experimental study," Games and Economic Behavior, Elsevier, vol. 58(1), pages 50-74, January.
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  20. Guth, Werner & Ivanova-Stenzel, Radosveta, 2003. "Asymmetric auction experiments with(out) commonly known beliefs," Economics Letters, Elsevier, vol. 80(2), pages 195-199, August.
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  23. Axel Ockenfels & Reinhard Selten, 2004. "Impulse Balance Equilibrium and Feedback in First Price Auctions," Working Paper Series in Economics 7, University of Cologne, Department of Economics.
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  27. repec:att:wimass:9215 is not listed on IDEAS
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Citations

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Cited by:
  1. Ivanova-Stenzel, Radosveta & Salmon, Timothy C., 2008. "Revenue equivalence revisited," Games and Economic Behavior, Elsevier, vol. 64(1), pages 171-192, September.
  2. Theodore L. Turocy & Elizabeth Watson, 2012. "Reservation Values and Regret in Laboratory First-Price Auctions: Context and Bidding Behavior," Southern Economic Journal, Southern Economic Association, vol. 78(4), pages 1163-1180, April.
  3. Ulrike Malmendier & Young Han Lee, 2011. "The Bidder's Curse," American Economic Review, American Economic Association, vol. 101(2), pages 749-87, April.
  4. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
  5. Kirchkamp, Oliver & Reiss, J. Philipp & Sadrieh, Abdolkarim, 2008. "A pure variation of risk in private-value auctions," Research Memorandum 050, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  6. Tibor Neugebauer & Sascha Fllbrunn, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," LSF Research Working Paper Series 13-10, Luxembourg School of Finance, University of Luxembourg.
  7. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," Theory and Decision, Springer, vol. 75(3), pages 421-447, September.

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