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Procurement auctions with avoidable fixed costs: an experimental approach

  • Larson, Nathan
  • Elmaghraby, Wedad

Bidders in procurement auctions often face avoidable fixed costs. This can make bidding decisions complex and risky, and market outcomes volatile. If bidders deviate from risk neutral best responses, either due to faulty optimization or risk attitudes, then equilibrium predictions can perform poorly. In this paper, we confront laboratory bidders with three auction formats that make bidding difficult and risky in different ways. We find that measures of `difficulty' provide a consistent explanation of deviations from best response bidding across the three formats. In contrast, risk and loss preferences cannot explain behavior across all three formats.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32163.

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Date of creation: 2008
Date of revision: 2011
Handle: RePEc:pra:mprapa:32163
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  1. Scott E. Page, 1996. "Two measures of difficulty (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 321-346.
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  8. Page, Scott E, 1996. "Two Measures of Difficulty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 321-46, August.
  9. Terry Jones & Stephanie Forrest, 1995. "Fitness Distance Correlation as a Measure of Problem Difficulty for Genetic Algorithms," Working Papers 95-02-022, Santa Fe Institute.
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  17. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September.
  18. DeMartini, Christine & Kwasnica, Anthony M. & Ledyard, John O. & Porter, David, 1998. "A New and Improved Design For Multi-Object Iterative Auctions," Working Papers 1054, California Institute of Technology, Division of the Humanities and Social Sciences.
  19. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers 02004, Stanford University, Department of Economics.
  20. Hobbs, Benjamin F. & Rothkopf, Michael H. & Hyde, Laurel C. & O'Neill, Richard P., 2000. "Evaluation of a Truthful Revelation Auction in the Context of Energy Markets with Nonconcave Benefits," Journal of Regulatory Economics, Springer, vol. 18(1), pages 5-32, July.
  21. Van Boening, Mark V & Wilcox, Nathaniel T, 1996. "Avoidable Cost: Ride a Double Auction Roller Coaster," American Economic Review, American Economic Association, vol. 86(3), pages 461-77, June.
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