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Theoretical and experimental analysis of auctions with negative externalities

Author

Listed:
  • Hu, Youxin
  • Kagel, John
  • Xu, Xiaoshu
  • Ye, Lixin

Abstract

We investigate a private value auction in which a single “entrant” on winning imposes a negative externality on two “regular” bidders. In an English auction when all bidders are active, “regular” bidders free ride, exiting before price reaches their values. In a first-price sealed-bid auction incentives for free riding and aggressive bidding coexist, limiting free riding compared to the English auction. We find substantial, though incomplete, free riding in the clock auction. In first-price auctions, regular bidders bid more aggressively than the “entrant” and both bid higher than in auctions with no externality. Predictions regarding revenue, efficiency, and successful entry between the two auctions are satisfied.

Suggested Citation

  • Hu, Youxin & Kagel, John & Xu, Xiaoshu & Ye, Lixin, 2013. "Theoretical and experimental analysis of auctions with negative externalities," Games and Economic Behavior, Elsevier, vol. 82(C), pages 269-291.
  • Handle: RePEc:eee:gamebe:v:82:y:2013:i:c:p:269-291
    DOI: 10.1016/j.geb.2013.07.012
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    References listed on IDEAS

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    Cited by:

    1. Hu, Youxin & Kagel, John & Xu, Xiaoshu & Ye, Lixin, 2013. "Theoretical and experimental analysis of auctions with negative externalities," Games and Economic Behavior, Elsevier, vol. 82(C), pages 269-291.
    2. repec:eee:indorg:v:55:y:2017:i:c:p:58-90 is not listed on IDEAS
    3. Pagnozzi, Marco & Rosato, Antonio, 2016. "Entry by takeover: Auctions vs. bilateral negotiations," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 68-84.
    4. Zhou, Tim, 2015. "Failed bank auctions and externalities," MPRA Paper 65587, University Library of Munich, Germany.

    More about this item

    Keywords

    Auctions; Externality; Free riding; Aggressive bidding; Experiments;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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