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Explaining deviations from equilibrium in auctions with avoidable fixed costs

  • Elmaghraby, Wedad J.
  • Larson, Nathan

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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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 76 (2012)
Issue (Month): 1 ()
Pages: 131-159

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Handle: RePEc:eee:gamebe:v:76:y:2012:i:1:p:131-159
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
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  4. Kagel, John H. & Levin, Dan, 2005. "Multi-unit demand auctions with synergies: behavior in sealed-bid versus ascending-bid uniform-price auctions," Games and Economic Behavior, Elsevier, vol. 53(2), pages 170-207, November.
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  7. Page, Scott E, 1996. "Two Measures of Difficulty," Economic Theory, Springer, vol. 8(2), pages 321-46, August.
  8. Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
  9. Scott E. Page, 1996. "Two measures of difficulty (*)," Economic Theory, Springer, vol. 8(2), pages 321-346.
  10. Mark V. Van Boening & Nathaniel T. Wilcox, 2005. "A Limit of Bilateral Contracting Institutions," Economic Inquiry, Western Economic Association International, vol. 43(4), pages 840-854, October.
  11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  12. Wilcox, Nathaniel, 2007. "Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk," MPRA Paper 11851, University Library of Munich, Germany.
  13. Blavatskyy, Pavlo R., 2011. "Probabilistic risk aversion with an arbitrary outcome set," Economics Letters, Elsevier, vol. 112(1), pages 34-37, July.
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