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Opportunity cost, inattention and the bidder’s curse

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  • Freeman, David J.
  • Kimbrough, Erik O.
  • Reiss, J. Philipp

Abstract

Auction winners sometimes suffer a “bidder’s curse”, paying more for an item at auction than the fixed price charged for an identical item by other sellers. This seemingly irrational behavior is puzzling because the information necessary to avoid overpaying would appear to be readily available to bidders, yet they seem to ignore it. To understand this behavior, we consider the bidders’ decisions whether to acquire information about the fixed price before bidding, in the presence of opportunity costs. Our theory introduces costly information acquisition into an auction model, with a fixed price aftermarket selling an identical good. When information about the fixed price is costly, bidders sometimes remain rationally ignorant and overbid in the auction, generating the bidder’s curse. To assess the empirical validity of our proposed explanation, we study the model’s predictions in an experiment where subjects have an opportunity cost of looking up a fixed price and bid in an auction. We find that information acquisition decreases and overbidding increases with opportunity cost as predicted. Most observed lookup behavior is rationalizable and rational ignorance reliably generates the bidder’s curse.

Suggested Citation

  • Freeman, David J. & Kimbrough, Erik O. & Reiss, J. Philipp, 2020. "Opportunity cost, inattention and the bidder’s curse," European Economic Review, Elsevier, vol. 129(C).
  • Handle: RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301744
    DOI: 10.1016/j.euroecorev.2020.103543
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    Cited by:

    1. Fabian Ocker, 2018. "“Bid more, pay less” – overbidding and the Bidder’s curse in teleshopping auctions," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(4), pages 491-508, November.

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    More about this item

    Keywords

    Auctions; Bidder’S curse; Limited attention; Experiments; Rational ignorance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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