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Aversion to Price Risk and the Afternoon Effect

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  • Mezzetti, Claudio

    (Department of Economics, University of Warwick)

Abstract

Many empirical studies of auctions show that prices of identical goods sold sequentially follow a declining path. Declining prices have been viewed as an anomaly, because the theoretical models of auctions predict that the price sequence should either be a martingale (with independent signals and no informational externalities), or a submartingale (with a¢ liated signals). This paper shows that declining prices, the afternoon effect, arise naturally when bidders are averse to price risk. A bidder is averse to price risk if he prefers to win an object at a certain price, rather than at a random price with the same expected value. When bidders have independent signals and there are no informational externalities, only the effect of aversion to price risk is present and the price sequence is a supermartingale. When there are informational externalities, even with independent signals, there is a countervailing, informational effect, which pushes prices to raise along the path of a sequential auction. This may help explaining the more complex price paths we observe in some auctions

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 857.

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Length: 37 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wrk:warwec:857

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Keywords: Afternoon Effect ; Declining Price Anomaly ; Efficient Auctions ; Multi-Unit Auctions ; Price Risk ; Revenue Equivalence ; Risk Aversion ; Sequential Auctions;

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References

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  1. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Ashenfelter, O. & Genesove, D., 1992. "Testing for Price Anomalies in Real Estate Auctions," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 92-2, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Bernhardt, Dan & Scoones, David, 1993. "A Note on Sequential Auctions," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 829, California Institute of Technology, Division of the Humanities and Social Sciences.
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  6. Jones, C. & Menezes, F. & Vella, F., 1996. "Auctions Price Anomalies: Evidence from Wool Auctions in Australia," Papers, Australian National University - Department of Economics 303, Australian National University - Department of Economics.
  7. Kathryn Graddy & Orley Ashenfelter, 2002. "Auctions and the Price of Art," Economics Series Working Papers 131, University of Oxford, Department of Economics.
  8. Victor Ginsburgh & Jan van Ours, 2007. "How to organize a sequential auction: results of a natural experiment by Christie's," ULB Institutional Repository 2013/5255, ULB -- Universite Libre de Bruxelles.
  9. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521536721.
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  19. repec:att:wimass:9215 is not listed on IDEAS
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  24. repec:wop:humbsf:1998-62 is not listed on IDEAS
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