Auction Fever: Theory and Experimental Evidence
AbstractIt is not a secret that certain auction formats yield on average higher prices than others. The phenomenon that dynamic auctions are more likely to elicit higher bids than static one-shot auctions is often associated with the term ''auction fever.'' On a psychological level, we consider the so-called pseudo-endowment effect as largely responsible for peoples’ tendency to submit higher bids, potentially amplified by the source-dependence effect. The phenomenon of auction fever is replicated in an experimental investigation of different auction formats within a private values framework where bidders have private but incomplete knowledge of their valuation for a hypothetical good. We suggest this assumption to be more realistic than definite private values, as assumed in the traditional IPV model. An additional experimental investigation within the traditional IPV framework does not either reveal any indication for the appearance of auction fever. On the basis of our experimental observations we present a model of reference-dependent utility theory that comprehends the phenomenon by assuming that bidders' reference points are shifted by the pseudo-endowment and the source-dependence effect.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 08-27.
Length: 37 pages
Date of creation: 15 Dec 2008
Date of revision:
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. We thank Giulio Bottazzi, Clemens Puppe, and Reinhard Selten for helpful comments.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-17 (All new papers)
- NEP-EXP-2009-01-17 (Experimental Economics)
- NEP-UPT-2009-01-17 (Utility Models & Prospect Theory)
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- Matthew W. McCarter & Abel M. Winn, 2013. "When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever," Working Papers 13-19, Chapman University, Economic Science Institute.
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