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Bidding in first-price and second-price interdependent-values auctions: A laboratory experiment

Author

Listed:
  • Theodore L. Turocy

    (University of East Anglia)

  • Timothy N. Cason

    (Purdue University)

Abstract

We report a laboratory experiment on first-price and second-price auctions in settings with independent signals and interdependent values. The environment includes independent private values and the common-value "wallet game" as limiting cases. We manipulate the degree of interdependence of values across sessions, while maintaining the same Bayes-Nash equilibrium bidding function. In contrast, cursed equilibrium predicts bids will be raised for lower signals. We find some support for cursed equilibrium, in that bids change as the degree of value interdependence changes. Contrary to both Bayes-Nash and cursed equilibrium, auction revenues are largest for intermediate levels of interdependence. We construct a model combining cursedness with an underweighting of the opportunity costs of higher bids, and find substantial bidder heterogeneity. A majority of bidders are either fully cursed and disregard completely the bad news that winning the auction entails, or are not cursed at all. We also find evidence for some systematic procedural differences in bidding between first-price and second-price auctions.

Suggested Citation

  • Theodore L. Turocy & Timothy N. Cason, 2015. "Bidding in first-price and second-price interdependent-values auctions: A laboratory experiment," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 15-23, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:wcbess:15-23
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    References listed on IDEAS

    as
    1. Theodore L. Turocy & Elizabeth Watson, 2012. "Reservation Values and Regret in Laboratory First-Price Auctions: Context and Bidding Behavior," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1163-1180, April.
    2. Richard Engelbrecht-Wiggans & Elena Katok, 2009. "A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions," Decision Analysis, INFORMS, vol. 6(2), pages 75-86, June.
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    5. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
    6. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
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    12. Robert Forsythe & R. Mark Isaac & Thomas R. Palfrey, 1989. "Theories and Tests of "Blind Bidding" in Sealed-Bid Auctions," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 214-238, Summer.
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    Cited by:

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    2. Lindsay, Luke, 2019. "Adaptive loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 168(C), pages 43-61.
    3. Nichole Szembrot, 2018. "Experimental study of cursed equilibrium in a signaling game," Experimental Economics, Springer;Economic Science Association, vol. 21(2), pages 257-291, June.
    4. Leonidas Spiliopoulos & Andreas Ortmann, 2018. "The BCD of response time analysis in experimental economics," Experimental Economics, Springer;Economic Science Association, vol. 21(2), pages 383-433, June.

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    More about this item

    Keywords

    auctions; affiliated values; winner's curse; wallet game; experiments;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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