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Step-Level Reasoning and Bidding in Auctions

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  • Uri Gneezy

    () (Graduate School of Business, The University of Chicago, 5807 S. Woodlawn, Suite 519, Chicago, Illinois 60637)

Abstract

Step-level models of reasoning (SLR) proved to be very successful in predicting behavior in the beauty contest game. Recently, a quantified version of the model was suggested as a more general model of thinking. In particular, it was found that the distribution of choices could be represented by a Poisson distribution. I test the model in stylized first- and second-price common-value sealed-bid auctions. Equilibrium, for both auction types, prescribes that players undercut each other and profits are small. The SLR prediction, on the other hand, is different for the two auctions. Nash equilibrium predicts the outcomes poorly; the SLR model predicts the outcomes well in the second-price auction. However, while bids in the first-price auction could be represented by a Poisson distribution, this could not be attributed to step-level reasoning.

Suggested Citation

  • Uri Gneezy, 2005. "Step-Level Reasoning and Bidding in Auctions," Management Science, INFORMS, vol. 51(11), pages 1633-1642, November.
  • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:11:p:1633-1642
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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0423
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    References listed on IDEAS

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    Cited by:

    1. Mariano Runco, 2015. "Bounded Rationality in a Cournot Duopoly Game," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 79-94, November.
    2. Matthias Sutter & Simon Czermak & Francesco Feri, 2010. "Strategic sophistication of individuals and teams in experimental normal-form games," Working Papers 2010-02, Faculty of Economics and Statistics, University of Innsbruck.
    3. Breitmoser, Yves & Tan, Jonathan H.W. & Zizzo, Daniel John, 2014. "On the beliefs off the path: Equilibrium refinement due to quantal response and level-k," Games and Economic Behavior, Elsevier, vol. 86(C), pages 102-125.
    4. Verena Utikal, 2013. "I am sorry - Honest and fake apologies," TWI Research Paper Series 81, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    5. Dufwenberg, Martin & Sundaram, Ramya & Butler, David J., 2010. "Epiphany in the Game of 21," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 132-143, August.
    6. Berger, Ulrich & De Silva, Hannelore & Fellner-Röhling, Gerlinde, 2016. "Cognitive Hierarchies in the Minimizer Game," Department of Economics Working Paper Series 4805, WU Vienna University of Economics and Business.
    7. Andrés Romeu, 2011. "Cluster Detection in Laboratory Auction Data: A Model-Based Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 473-488, December.
    8. Martin G. Kocher & Matthias Sutter & Florian Wakolbinger, 2007. "The Impact of Naïve Advice and Observational Learning in Beauty-contest Games," Tinbergen Institute Discussion Papers 07-015/1, Tinbergen Institute.
    9. Berger, Ulrich & De Silva, Hannelore & Fellner-Röhling, Gerlinde, 2016. "Cognitive hierarchies in the minimizer game," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 337-348.
    10. Richard Engelbrecht-Wiggans & Ernan Haruvy & Elena Katok, 2007. "A Comparison of Buyer-Determined and Price-Based Multiattribute Mechanisms," Marketing Science, INFORMS, vol. 26(5), pages 629-641, 09-10.
    11. Bucchianeri, Grace W. & Minson, Julia A., 2013. "A homeowner's dilemma: Anchoring in residential real estate transactions," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 76-92.
    12. Erik Wengström, 2008. "Price competition, level-k theory and communication," Economics Bulletin, AccessEcon, vol. 3(66), pages 1-15.
    13. Sutter, Matthias & Czermak, Simon & Feri, Francesco, 2013. "Strategic sophistication of individuals and teams. Experimental evidence," European Economic Review, Elsevier, vol. 64(C), pages 395-410.

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    Keywords

    depth of reasoning; bidding behavior;

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