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Aversion to Price Risk and the Afternoon Effect

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Author Info
Mezzetti, Claudio (Department of Economics, University of Warwick)

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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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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
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Handle: RePEc:wrk:warwec:857

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

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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    Other versions:
  4. Black, Jane & De Meza, David, 1992. "Systematic Price Differences between Successive Auctions Are No Anomaly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 607-28, Winter.
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  7. Gale, Ian L. & Stegeman, Mark, 2001. "Sequential Auctions of Endogenously Valued Objects," Games and Economic Behavior, Elsevier, vol. 36(1), pages 74-103, July. [Downloadable!] (restricted)
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  9. Victor A. Ginsburgh, 1998. "Absentee Bidders and the Declining Price Anomaly in Wine Auctions," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1302-1331, December. [Downloadable!] (restricted)
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  11. Ours, J.C. van & Ginsburgh, V., 2003. "How to organize sequential auctions results of a natural experiment by Christie's," Discussion Paper 25, Tilburg University, Center for Economic Research. [Downloadable!]
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  15. Jeitschko, Thomas D., 1999. "Equilibrium price paths in sequential auctions with stochastic supply," Economics Letters, Elsevier, vol. 64(1), pages 67-72, July. [Downloadable!] (restricted)
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  17. Engelbrecht-Wiggans, Richard, 1994. "Sequential auctions of stochastically equivalent objects," Economics Letters, Elsevier, vol. 44(1-2), pages 87-90. [Downloadable!] (restricted)
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