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Auctioning to Buyers with Correlated Values

Author

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  • Robert G. Hammond

    (Department of Economics, North Carolina State University)

Abstract

In a laboratory setting, a monopolistic auctioneer sells to buyers as the level and nature of demand changes. I ask whether sellers correctly recognize the role played by correlation among buyers' values. The prices set by subjects closely match the risk-neutral benchmark predictions when demand follows the independent-private-values framework. In contrast, subjects fail to correctly account for correlation among buyers' values once the independence assumption is dropped. I offer two new models of pricing in a correlated-values environment. The model that suggests sellers ignore correlation outperforms both the benchmark and the model that suggests sellers incorrectly account for correlation.

Suggested Citation

  • Robert G. Hammond, 2007. "Auctioning to Buyers with Correlated Values," Working Paper Series 021, North Carolina State University, Department of Economics, revised 22 Jan 2010.
    • Handle: RePEc:ncs:wpaper:021
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    File URL: ftp://ftp.ncsu.edu/pub/ncsu/economics/RePEc/pdf/Exp_Pricing_A.pdf
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    References listed on IDEAS

    as
    1. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    2. Ruqu Wang, 1998. "Auctions versus Posted-Price Selling: The Case of Correlated Private Valuations," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 395-410, May.
    3. 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.
    4. Levin, Dan & Smith, James L, 1996. "Optimal Reservation Prices in Auctions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1271-1283, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Auction; correlated values; monopoly; laboratory experiment;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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