Explaining deviations from equilibrium in auctions with avoidable fixed costs
Bidders often face avoidable fixed costs or other synergies that can make bidding decisions complex and risky, and market outcomes volatile. If bidders deviate from risk neutral best responses, either due to faulty optimization or a preference to avoid volatility, then equilibrium predictions can perform poorly. In this paper, we confront laboratory bidders with three auction formats that make bidding difficult in different ways. We find that measures of ‘difficulty’ provide a consistent explanation of deviations from best response bidding across the three formats.
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