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A Transaction Utility Approach for Bidding in Second-Price Auctions

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  • Sayman, Serdar
  • Akçay, Yalçın

Abstract

In both the Vickrey and eBay auctions, bidding the reservation price is the optimal strategy within the conventional utility framework. However, in practice, buyers tend to bid less than their reservation prices, and bid multiple times, thus increase their bids, in the course of an auction. In this paper, we show that both underbidding and multiple bidding behaviors can be consistent with utility maximization, if buyer's utility incorporates a transaction utility (reference price dependent) component. Transaction utility is based on the difference between the buyer's reference price and actual price paid; it captures the perceived value of the deal. More specifically, we show that the optimal bid is lower than the reservation price, but higher than the reference price. Furthermore, buyer may re-bid (above the prior optimal level) if the reference price is revised upon observing a higher current price.

Suggested Citation

  • Sayman, Serdar & Akçay, Yalçın, 2020. "A Transaction Utility Approach for Bidding in Second-Price Auctions," Journal of Interactive Marketing, Elsevier, vol. 49(C), pages 86-93.
    • Handle: RePEc:eee:joinma:v:49:y:2020:i:c:p:86-93
    DOI: 10.1016/j.intmar.2019.06.001
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    Cited by:

    1. Vahid Ashrafimoghari & Jordan W. Suchow, 2022. "A Game-theoretic Model of the Consumer Behavior Under Pay-What-You-Want Pricing Strategy," Papers 2207.08923, arXiv.org.
    2. Han, Jidong & Popkowski Leszczyc, Peter T.L. & Zhang, Zelin, 2021. "Empirical Analyses of Nonlinear Effects of Reserve Prices on Ending Prices in Online Auctions," Journal of Interactive Marketing, Elsevier, vol. 54(C), pages 86-102.

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