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The Effect of Framing in Sealed-Bid Auctions: Theory and Experiments

Author

Listed:
  • Yutaka Kayaba

    (Department of Economics, University of Tokyo)

  • Jun Maekawa

    (Department of Economics, Osaka University of Economics and Law)

  • Hitoshi Matsushima

    (Department of Economics, University of Tokyo)

Abstract

We investigate strategic games with imperfect information, such as sealed-bid auctions, wherein players are not good at hypothetical thinking and are therefore unable to select even dominant strategies unless devices to guide them are put in place. We propose a measure to encourage such bounded-rational players to engage in hypothetical thinking. We consider a frame as a multi-stage game format with imperfect information within a range consistent with an inherent strategic game. We showed that a well-specified frame has a significant effect on the promotion of hypothetical thinking. By comparing the second-price auction as a non-frame format and the ascending proxy auctions as framed formats, we theoretically demonstrate that framing can eliminate overbidding and encourage bidders to act more sincerely. These theoretical findings were confirmed by both online and laboratory experimental results.

Suggested Citation

  • Yutaka Kayaba & Jun Maekawa & Hitoshi Matsushima, 2023. "The Effect of Framing in Sealed-Bid Auctions: Theory and Experiments," CARF F-Series CARF-F-567, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf567
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    References listed on IDEAS

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