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Theory And Misbehavior Of First-Price Auctions: The Importance Of Information Feedback In Experimental Markets

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Author Info

  • Tibor Neugebauer

    (University Hannover)

  • Javier Perote

    (Juan Carlos University Madrid)

Abstract

This article reports the results of a market experiment designed to test the predictions of the constant relative risk aversion model and to study the importance of information feedback in repeated first-price sealed-bid auctions. The data reveal that introduction of price information feedback implies a significant change of individual behavior. Without price information feedback, the data support the risk neutral Nash equilibrium prediction; with price information feedback, on the other hand, subjects overbid the risk neutral Nash equilibrium significantly. The constant relative risk aversion model is rejected since it predicts overbidding for both feedback conditions.

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File URL: http://128.118.178.162/eps/exp/papers/0503/0503008.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0503008.

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Length: 25 pages
Date of creation: 25 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpex:0503008

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

Related research

Keywords: Experimental Economics; First-price Sealed-bid Auctions; Independent Private Value Model; Bidding Theory; Risk Aversion;

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References

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  1. Walker, James M. & Smith, Vernon L. & Cox, James C., 1987. "Bidding behavior in first price sealed bid auctions : Use of computerized Nash competitors," Economics Letters, Elsevier, vol. 23(3), pages 239-244.
  2. Kagel, John H & Roth, Alvin E, 1992. "Theory and Misbehavior in First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1379-91, December.
  3. Merlo, Antonio & Schotter, Andrew, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1413-25, December.
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  6. Cox, James C & Smith, Vernon L & Walker, James M, 1988. " Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 61-99, March.
  7. Cox, James C & Smith, Vernon L & Walker, James M, 1984. " Theory and Behavior of Multiple Unit Discriminative Auctions," Journal of Finance, American Finance Association, vol. 39(4), pages 983-1010, September.
  8. Axel Ockenfels & Reinhard Selten, 2002. "Impulse Balance Equilibrium and Feedback in First Price Auctions," Papers on Strategic Interaction 2002-12, Max Planck Institute of Economics, Strategic Interaction Group.
  9. Palfrey, Thomas R. & Goeree, Jacob & Holt, Charles, 2000. "Quantal Response Equilibrium and Overbidding in Private-value Auctions," Working Papers 1073, California Institute of Technology, Division of the Humanities and Social Sciences.
  10. Chen, Kay-Yut & Plott, Charles R., . "Nonlinear Behavior in Sealed Bid First Price Auctions," Working Papers 774, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. 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.
  12. Cox, James C & Smith, Vernon L & Walker, James M, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1392-412, December.
  13. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
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  15. Friedman, Daniel, 1985. "Experimental Economics: Comment," American Economic Review, American Economic Association, vol. 75(1), pages 264, March.
  16. Cox, James C. & Smith, Vernon L. & Walker, James M., 1983. "Tests of a heterogeneous bidders theory of first price auctions," Economics Letters, Elsevier, vol. 12(3-4), pages 207-212.
  17. Harrison, Glenn W, 1989. "Theory and Misbehavior of First-Price Auctions," American Economic Review, American Economic Association, vol. 79(4), pages 749-62, September.
  18. Tibor Neugebauer & Reinhard Selten, 2002. "Individual Behavior of First-Price Sealed-Bid Auctions: The Importance of Information Feedback in Experimental Markets," Bonn Econ Discussion Papers, University of Bonn, Germany bgse3_2003, University of Bonn, Germany.
  19. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers, UCLA Department of Economics 357966000000000089, UCLA Department of Economics.
  20. Selten, Reinhard & Stoecker, Rolf, 1986. "End behavior in sequences of finite Prisoner's Dilemma supergames A learning theory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 47-70, March.
  21. Friedman, Daniel, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1374-78, December.
  22. Ashenfelter, Orley, 1989. "How Auctions Work for Wine and Art," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 23-36, Summer.
  23. Cox, James C & Smith, Vernon L & Walker, James M, 1985. "Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk Aversion," American Economic Review, American Economic Association, vol. 75(2), pages 160-65, May.
  24. Tibor Neugebauer, 2005. "Bidding Strategies Of Sequential First Price Auctions Programmed By Experienced Bidders," Experimental, EconWPA 0503007, EconWPA.
  25. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-43, December.
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