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Bidding with Outside Options

  • Kirchkamp, Oliver

    ()

    (Sonderforschungsbereich 504)

  • Poen, Eva

    ()

    (University of St. Gallen, FEW-HSG)

  • Reiß, J. Philipp

    ()

    (University of Magdeburg, Faculty of Economics and Management May 2004)

We introduce and experimentally test an auction model that allows for outside options of bidders as substitutes for the auctioned object under the private values assumption. Theoretically and in the experiments, bidders respond to their individual outside options and to variations of common knowledge about competitors outside options. Interestingly, private outside options induce concave equilibrium bidding functions with uniformly distributed valuations. The bidding data does support this property. As theoretically predicted, lower-valued outside options lead individuals to bid more aggressively in the experiments.

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File URL: http://www.kirchkamp.de/research/outsideoptions.html
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-21.

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Length: 30 pages
Date of creation: 08 Jun 2004
Date of revision:
Handle: RePEc:xrs:sfbmaa:04-21
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. We thank Rachel Croson, Dan Friedman, Johanna Goertz, and Stefan Trautmann for helpful comments and stimulating discussions.
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  1. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Kirchkamp, Oliver & Moldovanu, Benny, 2004. "An experimental analysis of auctions with interdependent valuations," Games and Economic Behavior, Elsevier, vol. 48(1), pages 54-85, July.
  3. Werner G¸th & Radosveta Ivanova-Stenzel & Manfred K–nigstein & Martin Strobel, 2003. "Learning to bid - an experimental study of bid function adjustments in auctions and fair division games," Economic Journal, Royal Economic Society, vol. 113(487), pages 477-494, 04.
  4. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  5. Axel Ockenfels & Reinhard Selten, 2004. "Impulse Balance Equilibrium and Feedback in First Price Auctions," Working Paper Series in Economics 7, University of Cologne, Department of Economics.
  6. Robert Dorsey & Laura Razzolini, 2003. "Explaining Overbidding in First Price Auctions Using Controlled Lotteries," Experimental Economics, Springer;Economic Science Association, vol. 6(2), pages 123-140, October.
  7. Werner Güth & Radosveta Ivanova-Stenzel & Manfred Königstein & Martin Strobel, 2002. "Bid Functions in Auctions and Fair Division Games: Experimental Evidence," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 461-484, November.
  8. Kathryn Graddy & Orley Ashenfelter, 2002. "Auctions and the Price of Art," Economics Series Working Papers 131, University of Oxford, Department of Economics.
  9. Guth, Werner & Ivanova-Stenzel, Radosveta, 2003. "Asymmetric auction experiments with(out) commonly known beliefs," Economics Letters, Elsevier, vol. 80(2), pages 195-199, August.
  10. Brosig, Jeannette & Rei[ss], J. Philipp, 2007. "Entry decisions and bidding behavior in sequential first-price procurement auctions: An experimental study," Games and Economic Behavior, Elsevier, vol. 58(1), pages 50-74, January.
  11. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  12. Kagel, John H & Harstad, Ronald M & Levin, Dan, 1987. "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica, Econometric Society, vol. 55(6), pages 1275-1304, November.
  13. Cox, James C & Smith, Vernon L & Walker, James M, 1988. "Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 61-99, March.
  14. Isaac, R. Mark & Walker, James M., 1985. "Information and conspiracy in sealed bid auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 6(2), pages 139-159, June.
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