IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Auction Models When Bidders Make Small Mistakes: Consequences for Theory and Estimation

Listed author(s):
  • Patrick Bajari
  • Ali Hortacsu

August 2001 In this paper, we explore the consequences of using equilibrium models of auctions in making policy recommendations, such as the design of real world markets, or as a basis for structural estimation when bidders make small errors in optimization. We consider two types of error prone behavior that nest Bayes-Nash equilibrium as a special case. The first is the logit equilibrium model of McKelvey and Palfrey (1995) where bidders measure their payoffs imperfectly. The second is a submission error model where bidders submit an unintended bid with positive probability. First, we establish that when the number of bidders is sufficiently large, even if bidders maximize expected profits to within a few cents, the predictions of the logit equilibrium model can differ greatly from the predictions of a Bayes-Nash equilibrium model. Second, we demonstrate that if we structurally estimate the model assuming that bidders are playing a Bayes-Nash equilibrium when instead they are acting according to the error submission model, we will tend to overestimate markups. Third, we use standard methods to non-parameterically estimate structural auction models on an experimental data set. We find that in experiments where the average valuation for the object being auctioned is fifteen dollars, bidders are within twenty cents of maximizing profits on average. However, in one of the experiments, the non-parameteric estimate of average markups is 40 percent while the true value is 20 percent. We conclude that it is important to conduct sensitivity analysis to determine how robust policy recommendations and parameter estimates are to a priori plausible amounts of error prone behavior. Working Papers Index

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Stanford University, Department of Economics in its series Working Papers with number 01011.

in new window

Date of creation: Aug 2001
Handle: RePEc:wop:stanec:01011
Contact details of provider: Postal:
Ralph Landau Economics Building, Stanford, CA 94305-6072

Phone: (650)-725-3266
Fax: (650)-725-5702
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wop:stanec:01011. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.