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Sealed bid auctions with uncertainty averse bidders

Author

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  • Kin Chung Lo

    (Department of Economics, York University, North York, Ontario, M3J IP3, CANADA)

Abstract

Traditional analysis of auctions assumes that each bidder's beliefs about opponents' valuations are represented by a probability measure. Motivated by experimental findings such as the Ellsberg Paradox, this paper examines the consequences of relaxing this assumption in the first and second price sealed bid auctions with independent private values. The multiple priors model of Gilboa and Schmeidler [Journal of Mathematical Economics, 18 (1989), 141-153] is adopted specifically to represent the bidders' (and the auctioneer's) preferences. The unique equilibrium bidding strategy in the first price auction is derived. Moreover, under an interesting parametric specialization of the model, it is shown that the first price auction Pareto dominates the second price auction.

Suggested Citation

  • Kin Chung Lo, 1998. "Sealed bid auctions with uncertainty averse bidders," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(1), pages 1-20.
  • Handle: RePEc:spr:joecth:v:12:y:1998:i:1:p:1-20
    Note: Received: December 15, 1995; revised version: February 19, 1997
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    Citations

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    Cited by:

    1. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    2. Levin, Dan & Ozdenoren, Emre, 2004. "Auctions with uncertain numbers of bidders," Journal of Economic Theory, Elsevier, vol. 118(2), pages 229-251, October.
    3. Bernhard Kasberger & Karl H. Schlag, 2017. "Robust Bidding in First-Price Auctions: How to Bid without Knowing what Otheres are Doing," Vienna Economics Papers 1707, University of Vienna, Department of Economics.
    4. Chen, Yan & Katuscak, Peter & Ozdenoren, Emre, 2007. "Sealed bid auctions with ambiguity: Theory and experiments," Journal of Economic Theory, Elsevier, vol. 136(1), pages 513-535, September.
    5. Volij, Oscar, 2002. "Payoff equivalence in sealed bid auctions and the dual theory of choice under risk," Economics Letters, Elsevier, vol. 76(2), pages 231-237, July.
    6. Yan Chen & Peter Katuscak & Emre Ozdenoren, 2005. "Sealed Bid Auctions with Ambiguity: An Experimental Study," CERGE-EI Working Papers wp269, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
    8. Yoo, Seung Han, 2014. "Learning a population distribution," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 188-201.
    9. Todd R. Kaplan & Shmuel Zamir, 2014. "Advances in Auctions," Discussion Papers 1405, Exeter University, Department of Economics.
    10. Takao Asano, 2004. "Portfolio Inertia under Ambiguity," ISER Discussion Paper 0609, Institute of Social and Economic Research, Osaka University.
    11. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-017-2416-4 is not listed on IDEAS
    12. Takao Asano, 2004. "Portfolio Inertia and [Epsilon]-Contaminations," ISER Discussion Paper 0610, Institute of Social and Economic Research, Osaka University.
    13. Atsushi Kajii & Takashi Ui, 2005. "Incomplete Information Games With Multiple Priors," The Japanese Economic Review, Japanese Economic Association, vol. 56(3), pages 332-351.
    14. Asano, Takao, 2006. "Portfolio inertia under ambiguity," Mathematical Social Sciences, Elsevier, vol. 52(3), pages 223-232, December.
    15. Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
    16. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications, Elsevier.
    17. Turocy, Theodore L., 2008. "Auction choice for ambiguity-averse sellers facing strategic uncertainty," Games and Economic Behavior, Elsevier, vol. 62(1), pages 155-179, January.
    18. Ahn, David S., 2007. "Hierarchies of ambiguous beliefs," Journal of Economic Theory, Elsevier, vol. 136(1), pages 286-301, September.
    19. Brigitte Godbillon-Camus, 2003. "Subjective evaluation, ambiguity and relational contracts," Working Papers of LaRGE Research Center 2003-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    20. Azrieli, Yaron & Teper, Roee, 2011. "Uncertainty aversion and equilibrium existence in games with incomplete information," Games and Economic Behavior, Elsevier, vol. 73(2), pages 310-317.
    21. Ellis, Andrew, 2016. "Condorcet meets Ellsberg," Theoretical Economics, Econometric Society, vol. 11(3), September.
    22. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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