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Theoretical and Experimental Analysis of Auctions with Negative Externalities

  • Hu, Youxin
  • Kagel, John
  • Xu, Xiaoshu
  • Ye, Lixin

We investigate a private value auction in which a single "entrant" on winning imposes a negative externality on two "regular" bidders. In an English auction, when all bidders are active "regulars" free ride, exiting before price reaches their value. In a first-price sealed-bid auction incentives for free riding and aggressive bidding coexist, limiting free riding. We find substantial, though incomplete, free riding in the clock auction. In first-price auctions, regular bidders bid more aggressively than the "entrant" and both bid higher than in auctions with no externality. Predictions regarding revenue, efficiency, and successful entry between the two auctions are satisfied.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47060.

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Date of creation: Dec 2012
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Handle: RePEc:pra:mprapa:47060
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  1. Simon, Leo K. & Zame, William R., 1987. "Discontinous Games and Endogenous Sharing Rules," Department of Economics, Working Paper Series qt8n46v2wv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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