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Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

  • Andreas Roider
  • Patrick W. Schmitz

The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.

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File URL: http://hdl.handle.net/10.1111/j.1467-9442.2012.01709.x
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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 114 (2012)
Issue (Month): 3 (09)
Pages: 808-830

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Handle: RePEc:bla:scandj:v:114:y:2012:i:3:p:808-830
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