The effect of corruption on bidding behavior in first-price auctions

When the owner of an object sells it through an auction run by an agent of hers, corruption may appear. In a first-price auction, corruption can make honest bidders more or less aggressive, or their behavior can remain unchanged. We identify sufficient conditions for each of the three possibilities. We analyze the effects of corruption on efficiency, bidders’ welfare and expected revenue. Our results apply as well to the situation—unrelated to corruption—where one of the bidders is granted a right of first refusal.     

Allotment in first-price auctions: an experimental investigation

We experimentally study the effects of allotment—the division of an item into homogeneous units—in independent private value auctions. We compare a bundling first-price auction with two equivalent treatments where allotment is implemented: a two-unit discriminatory auction and two simultaneous single-unit first-price auctions. We find that allotment in the form of a discriminatory auction generates a loss of efficiency with respect to bundling. In the allotment treatments, we observe large and persistent bid spread, and the discriminatory auction is less efficient than simultaneous auctions. We provide a unified interpretation of our results that is based on both a non-equilibrium response to the coordination problem characterizing the simultaneous auction format and a general class of behavioral preferences that includes risk aversion, joy of winning and loser’s regret as specific cases.     

Bidding behavior in asymmetric auctions: An experimental study

We review an asymmetric auction experiment. Based on Plum (Int. J. Game Theory 20 (1992) 393) private valuations of the two bidders are independently drawn from distinct but commonly known distributions, one of which first-order stochastically dominates the other. We test the qualitative properties of that model of asymmetric auctions, in particular whether the weak bidder behaves more aggressively than the strong, and then test bidders’ preference for first- vs. second-price auctions.     

Individual bidder behavior in first-price private value auctions

Individual bid functions display sensitivity to the strategic considerations inherent in first-price auctions. However, several formal models, including heterogeneous Nash equilibrium bidding models with constant relative risk aversion, perform quite poorly.     

Simultaneous versus sequential all-pay auctions: an experimental study

While both simultaneous and sequential contests are mechanisms used in practice such as crowdsourcing, job interviews and sports contests, few studies have directly compared their performance. By modeling contests as incomplete information all-pay auctions with linear costs, we analytically and experimentally show that the expected maximum effort is higher in simultaneous contests, in which contestants choose their effort levels independently and simultaneously, than in sequential contests, in which late entrants make their effort choices after observing all prior participants’ choices. Our experimental results also show that efficiency is higher in simultaneous contests than in sequential ones. Sequential contests’ efficiency drops significantly as the number of contestants increases. We also discover that when participants’ ability follows a power distribution, high ability players facing multiple opponents in simultaneous contests tend to under-exert effort, compared to theoretical predictions. We explain this observation using a simple model of overconfidence.     

The impact of public information on bidding in highway procurement auctions

A number of papers in the theoretical auction literature show that the release of information regarding the seller's valuation of an item can cause bidders to bid more aggressively. This widely accepted result in auction theory remains largely untested in the empirical literature. Recent theoretical work has also shown that this effect can be more pronounced in auctions with larger common cost uncertainty. We examine the impact of a policy change by the Oklahoma Department of Transportation that led to the release of the state's internal estimate of the costs to complete highway construction projects. We perform a differences-in-differences analysis comparing bidding in Texas, a state that had a uniform policy of revealing the same information all throughout the period of analysis, to bidding in Oklahoma. Our results show that, in comparison to Texas auctions, the average bid in Oklahoma fell after the change in engineers’ cost estimate (ECE) policy. This decline in bids was even larger for projects where the common uncertainty in costs is greater. Moreover, the within-auction standard deviation of bids fell after the change in ECE policy with the most significant decline observed again in projects with greater common cost uncertainty.     

Asymmetry and revenue in first-price auctions

We show by an example that in first-price IPV auctions, asymmetry in bidders' valuations need not reduce the revenue compared to a benchmark symmetric model with the same amount of social surplus. Asymmetry need not reduce competition in first-price auctions.     

English auctions with resale: An experimental study

I design and test a simple English auction and two English auctions with resale, but with different informational backgrounds. All three treatments theoretically have the same equilibrium. I find, however, that the possibility of resale alters behavior significantly. In the two treatments with resale, subjects deviated from both the Nash prediction and the common results about bidding behavior in English auctions. Subjects tend to overbid, when they are certain they can reap the whole surplus in the resale market. I employ different models like QRE and levels of reasoning and conclude that overbidding can be explained as a rational response to the noisy environment in markets with human participants, that is, as rational decision making when anticipating others to make errors. When the outcome of the resale market is not certain, there is significant signaling behavior and auction prices tend to be lower than the Nash prediction.     

Asymmetric auctions with resale: An experimental study

We study auctions with resale based on Hafalir and Krishna's (2008) [6] model. As predicted, weak bidders bid more with resale than without, so that average auction prices tend to increase. When the equilibrium calls for weak types to bid higher than their values with resale they do, but not nearly as much as the theory predicts. In other treatments outcomes are much closer to the risk neutral Nash model's predictions. Bid distributions for weak and strong types are more similar with resale than without, in line with the theory.     

The effect of information on the bidding and survival of entrants in procurement auctions

In government procurement auctions of construction contracts, entrants are typically less informed and bid more aggressively than incumbent firms. This bidding behavior makes them more susceptible to losses affecting their prospect of survival. In April of 2000, the Oklahoma Department of Transportation started releasing the internal cost estimates to complete highway construction projects. Using newly developed quantile regression approaches, this paper examines the impact of the policy change on aggressive entrants. First, we find that the information release eliminates the bidding differential between entrants and incumbents attributed to informational asymmetries. Second, we argue that the policy change affects the prospects of survival of entrants in the market. We find that those who used to exit the market relatively soon are now staying 37% longer, while at the median level bidding duration increased by roughly 68%. The policy has the potential to encourage entry in government procurement auctions and thus increase competition.     

Pre-auction offers in asymmetric first-price and second-price auctions

We consider first-price and second-price auctions with asymmetric buyers, and examine whether pre-auction offers to a subset of buyers are profitable. A single offer is never profitable prior to a second-price auction, but may be profitable prior to a first-price auction. However, a sequence of offers is profitable in either type of auction. In our model, suitably chosen pre-auction offers work because they move the assignment when bidder valuations are “near the top” closer to the optimal, revenue-maximizing assignment.     

Second chance offers versus sequential auctions: theory and behavior

Second chance offers in online marketplaces involve a seller conducting an auction for a single object and then using information from the auction to offer a losing bidder a take-it-or-leave-it price for another unit. We theoretically and experimentally investigate this practice and compare it to two sequential auctions. We show that the equilibrium bidding strategy in the second chance offer mechanism only exists in mixed strategies, and we observe that this mechanism generates more profit for the auctioneer than two sequential auctions. We also observe virtually no rejections of profitable offers in the ultimatum bargaining stage.      

An elementary proof of the common maximal bid in asymmetric first-price and all-pay auctions

We prove that the maximal bid in asymmetric first-price and all-pay auctions is the same for all bidders. Our proof is elementary, and does not require that bidders are risk neutral, or that the distribution functions of their valuations are independent or smooth.     

Revenue in first-price auctions with a buy-out price and risk-averse bidders

Journal of Economics - We model the “Buy-It-Now or Best Offer” eBay listing option as a first-price auction with a buy-out price and consider seller revenue when bidders are...     

Indicative bidding: An experimental analysis

Indicative bidding is a practice commonly used in sales of complex and very expensive assets. Theoretical analysis shows that efficient entry is not guaranteed under indicative bidding, since there is no equilibrium in which more qualified bidders are more likely to be selected for the final sale. Furthermore, there exist alternative bid procedures that, in theory at least, guarantee 100% efficiency and higher revenue for the seller. We employ experiments to compare actual performance between indicative bidding and one of these alternative procedures. The data shows that indicative bidding performs as well as the alternative procedure in terms of entry efficiency, while having other characteristics that favor it over the alternative procedure. Our results provide an explanation for the widespread use of indicative bidding despite the potential problem identified in the equilibrium analysis.     

Discrete clock auctions: an experimental study

We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. In theory, both the HRB and LAB auctions maximize revenues and are fully efficient in our setting. Our experimental results indicate that the LAB auction achieves higher revenues. This revenue result may explain the frequent use of LAB pricing. On the other hand, HRB is successful in eliciting true values of the bidders both theoretically and experimentally.     

Creating competition out of thin air: An experimental study of right-to-choose auctions

This paper presents an experimental study of a mechanism that is commonly used to sell multiple heterogeneous goods. The novel feature of this procedure is that instead of selling each good in a separate auction, the seller executes a single auction in which buyers, who may be interested in completely different goods, compete for the right to choose a good. We provide experimental evidence that a Right-to-Choose (RTC) auction can generate more revenue than the theoretically optimal auction. Moreover, in contrast to the “optimal” auction, the RTC auction is approximately efficient in the sense that the surplus it generates is close to the maximal one. Furthermore, a seller who would like to retain some of his goods can generate more revenue with a restricted RTC auction in which not all rights-to-choose are sold, than with the theoretically optimal auction.     

Competition in the economic crisis: Analysis of procurement auctions

We study the effects of the recent economic crisis on firms׳ bidding behavior and markups in sealed bid auctions. Using data from Austrian construction procurements, we estimate bidders׳ construction costs within a private value auction model. We find that markups of all bids submitted decrease by 1.5 percentage points in the recent economic crisis, markups of winning bids decrease by 3.3 percentage points. We also find that without the government stimulus package this decrease would have been larger. These two pieces of evidence point to pro-cyclical markups.     

Strategic decisions on bilateral bidding behavior: evidence from a wholesale electricity market

This article analyzes the strategic bilateral bidding behavior in the Spanish electricity wholesale market (OMEL). The collection of data includes information regarding weekly averages of spot prices, the quantity bid in the wholesale market, the quantities purchased in the wholesale market and sold in the open market, and the behavior of conduct parameters for the period from January 2002 to April 2007 for the four largest firms of the Spanish electricity market: Endesa, Iberdrola, Unión Fenosa and Hidrocantábrico. This article employs the New Empirical Industrial Organization approach. The empirical analysis was based on the autoregressive distributed lag approach to cointegration and on the Toda–Yamamoto Granger causality tests to validate the standard version of the theoretical formulation of the standard Cournot model, and its theoretical extension, to encompass the hypothesis of the presence of bid interdependence for electricity quantities sold and bought in the Spanish electricity wholesale market. The results of cointegration and causality analysis reinforce the empirical results of the extended Cournot model with the inclusion of the two main bidding variables that solved the optimization problem of profit maximization for each of the four firms analyzed.     

Trust,reputation and bidding behaviour in online mystery auctions

We use transactions from a distinctive online environment of ‘mystery’ auctions to examine the role that trust plays and how it impacts bidding behaviour when the exact characteristics of a good being auctioned are purposefully concealed from buyers. We show that buyers are generally trusting seller claims in online transactions and that seller reputation becomes significantly more important to buyers (as demonstrated by their bids) when the quality (or value) of the good is unspecified. Our findings can be extrapolated to consider broader economic implications of bidding behaviour impacted by trust, such as in financial markets, where over-bidding may lead to price bubbles.