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Speculation and demand reduction in English clock auctions with resale

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  • Saral, Krista Jabs

Abstract

Many auctions are followed by a resale market which occurs when the winner of the auction resells the item won to one of the participants from the original auction. The existence of such transactions may initially appear counter intuitive. However, this paper will show that active inter-bidder resale results from payoff maximizing decisions in the auction that take into account the incentives of a resale opportunity. Specifically, I examine how the existence of an inter-bidder resale opportunity impacts bidder behavior in an English clock auction, and to what extent altering the bargaining power of the final buyer and reseller in the resale market determines the strategies followed in the initial auction, in an attempt to understand the existence of these inter-bidder transactions. Theoretical and behavioral analysis is used to develop hypotheses of speculation (bidding above value) and demand reduction (bidding below value) which are directly tested in a controlled experimental setting. While value bidding is a dominant strategy in a standard English clock auction without resale, when resale is allowed, this theoretical claim is weaker. Demand reduction is observed when the bargaining power is shifted to the final buyer in resale and when the bargaining power is shifted toward the reseller, speculation is observed. The revenue achieved in the initial auction depends on the behavior observed in the auction. Regardless of bargaining power, revenue is shown to decrease below what would have been earned in an English auction without resale due to demand reduction. When the reseller has the bargaining power, and speculation is observed, this loss in revenue is somewhat mitigated by increased speculation.

Suggested Citation

  • Saral, Krista Jabs, 2012. "Speculation and demand reduction in English clock auctions with resale," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 416-431.
  • Handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:416-431
    DOI: 10.1016/j.jebo.2012.04.015
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marco Pagnozzi & Krista Jabs Saral, 2013. "Multi-Object Auctions with Resale: An Experimental Analysis," CSEF Working Papers 328, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Georganas, Sotiris, 2011. "English auctions with resale: An experimental study," Games and Economic Behavior, Elsevier, vol. 73(1), pages 147-166, September.
    3. Pagnozzi, Marco & Saral, Krista J., 2015. "Efficiency in Auctions with (Failed) Resale," MPRA Paper 63962, University Library of Munich, Germany.
    4. Pagnozzi, Marco & Saral, Krista J., 2016. "Entry by Successful Speculators in Auctions with Resale," MPRA Paper 70022, University Library of Munich, Germany.
    5. Marco Pagnozzi & Krista J. Saral, 2015. "Demand Reduction in Multi-Object Auctions with Resale: An Experimental Analysis," CSEF Working Papers 416, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    Auctions; Resale; Demand reduction; Speculation; Experimental economics;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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