Sealed Bid Auctions with Ambiguity: An Experimental Study

This study presents a laboratory experiment of the first and second price sealed bid auctions with independent private values, where the distribution of bidder valuations is unknown. In our experimental setting, in first price auctions, bids are lower with the presence of ambiguity. This result is consistent with ambiguity loving in a model which allows for different ambiguity attitudes. Alternative interpretations of this result, such as the hostile nature hypothesis proposed by psychologists, are discussed in the paper. Another departure from previous experimental studies is the use of subjects as auctioneers. We find that compared to zero reserve prices the presence of auctioneers significantly reduces revenue in first price auctions. It also significantly reduces bidder earnings and efficiency. Without knowledge of the distribution of bidder valuations and with auctioneers, the first and second price auctions generate the same amount of revenue.