IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Naive Bidding

  • George Deltas

    ()

    (University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, Illinois 61820, http://netfiles.uiuc.edu/deltas/www/index.html)

  • Richard Engelbrecht-Wiggans

    ()

    (University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, Illinois 61820)

This paper presents an equilibrium explanation for the persistence of naive bidding. Specifically, we consider a common value auction in which a "naive" bidder (who ignores the winner's curse) competes against a fully rational bidder. We show that the naive bidder earns higher equilibrium profits than the rational bidder when the signal distribution is symmetric and unimodal. We then consider a sequence of such auctions with randomly selected participants from a population of naive and rational bidders, with the proportion of bidder types in the population evolving in response to their relative payoffs in the auctions. We show that the evolutionary equilibrium contains a strictly positive proportion of naive bidders. Finally, we consider more general examples in which a naive bidder matched against a rational bidder does (i) worse than his rational opponent, but (ii) better than a rational bidder matched against another rational bidder. Again, the evolutionary equilibrium contains a strictly positive proportion of naive bidders. The results suggest that overconfident recent entrants in Internet and other low transaction-cost auctions of items that appeal to a mass audience may earn higher payoffs than their experienced competitors and, thus, will not eventually be driven from the market.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://dx.doi.org/10.1287/mnsc.1040.0330
Download Restriction: no

Article provided by INFORMS in its journal Management Science.

Volume (Year): 51 (2005)
Issue (Month): 3 (March)
Pages: 328-338

as
in new window

Handle: RePEc:inm:ormnsc:v:51:y:2005:i:3:p:328-338
Contact details of provider: Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
Phone: +1-443-757-3500
Fax: 443-757-3515
Web page: http://www.informs.org/Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:51:y:2005:i:3:p:328-338. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.