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Price formation in a sequential selling mechanism

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  • Ivanova-Stenzel, Radosveta
  • Kröger, Sabine

Abstract

This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second–price sealed–bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers’ behavior, but is not sufficient to explain sellers’ decisions. We discuss other behavioral explanations that could account for the observed deviations.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 92.

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Date of creation: Oct 2005
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Handle: RePEc:trf:wpaper:92

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Keywords: auction; negotiation; combined mechanism; sequential mechanism; risk preferences; experiment;

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References

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  1. Radosveta Ivanova-Stenzel & Timothy C. Salmon, 2004. "Bidder Preferences Among Auction Institutions," Experimental, EconWPA 0404005, EconWPA.
  2. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, Elsevier, vol. 104(1), pages 247-272, May.
  3. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 180-94, March.
  4. John Wooders & Stanley S. Reynolds, 2004. "Auctions with a Buy Price," Econometric Society 2004 North American Summer Meetings, Econometric Society 130, Econometric Society.
  5. René Kirkegaard, 2006. "A short proof of the Bulow-Klemperer auctions vs. negotiations result," Economic Theory, Springer, Springer, vol. 28(2), pages 449-452, 06.
  6. Kagel, J.H. & Levin, D., 1988. "Independent Private Value Auctions: Bidder Behavior In First, Second And Third-Price Auctions With Varying Numbers Of Bidders," Papers, Houston - Department of Economics 13, Houston - Department of Economics.
  7. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers, UCLA Department of Economics 357966000000000089, UCLA Department of Economics.
  8. Pezanis-Christou, P, 1997. "On the Impact of Low-Balling : Experimental Results in Asymmetric Auctions," Papers, New South Wales - School of Economics 97/05, New South Wales - School of Economics.
  9. Güth, Werner & Ivanova-Stenzel, Radosveta & Wolfstetter, Elmar, 2001. "Bidding behavior in asymmetric auctions: An experimental study," SFB 373 Discussion Papers 2001,15, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. Steven Anderson & Daniel Friedman & Garrett Milam & Nirvikar Singh, 2004. "Seller Strategies on eBay," Industrial Organization, EconWPA 0412004, EconWPA.
  11. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, Elsevier, vol. 45(1), pages 97-113, October.
  12. Hidvegi, Zoltan & Wang, Wenli & Whinston, Andrew B., 2006. "Buy-price English auction," Journal of Economic Theory, Elsevier, Elsevier, vol. 129(1), pages 31-56, July.
  13. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1644-1655, December.
  14. Budish, Eric B. & Takeyama, Lisa N., 2001. "Buy prices in online auctions: irrationality on the internet?," Economics Letters, Elsevier, Elsevier, vol. 72(3), pages 325-333, September.
  15. Timothy Mathews, 2004. "The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature," Journal of Economics, Springer, Springer, vol. 81(1), pages 25-52, 01.
  16. Chen, Kay-Yut & Plott, Charles R., . "Nonlinear Behavior in Sealed Bid First Price Auctions," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 774, California Institute of Technology, Division of the Humanities and Social Sciences.
  17. Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer, Springer, vol. 27(3), pages 597-613, 04.
  18. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
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Citations

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Cited by:
  1. Kirkegaard, René & Per Baltzer Overgaard, 2005. "Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions," Economics Working Papers, School of Economics and Management, University of Aarhus 2005-17, School of Economics and Management, University of Aarhus.
  2. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2006. "How eBay Sellers set “Buy-it-now†prices - Bringing The Field Into the Lab," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 181, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Nicholas Shunda, 2007. "Auctions with a Buy Price: The Case of Reference-Dependent Preferences," Working papers, University of Connecticut, Department of Economics 2007-42, University of Connecticut, Department of Economics.

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