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Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

  • Roider, Andreas
  • Schmitz, Patrick W

The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6476.

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Date of creation: Sep 2007
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Handle: RePEc:cpr:ceprdp:6476
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