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Author: Mariano Runco
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Languages : en
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This paper proposes a tractable model of reference dependent preferences to explain overbidding in private and common value auctions. It is assumed that the reference point is proportional to the value of the object and that losses are weighed more heavily than gains in the utility function. Equilibrium bidding strategies are derived for first- and second-price private and common value auctions. It is found that this model fits the data of all experiments analyzed better than a standard risk neutral model; moreover, it explains overbidding in private value auctions better than other alternatives. These results suggest that reference dependence, among other factors, might play a role in the widespread tendency of subjects to overbid in most experimental auctions.
Author: Mariano Runco
Publisher:
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Languages : en
Pages :
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Book Description
This paper proposes a tractable model of reference dependent preferences to explain overbidding in private and common value auctions. It is assumed that the reference point is proportional to the value of the object and that losses are weighed more heavily than gains in the utility function. Equilibrium bidding strategies are derived for first- and second-price private and common value auctions. It is found that this model fits the data of all experiments analyzed better than a standard risk neutral model; moreover, it explains overbidding in private value auctions better than other alternatives. These results suggest that reference dependence, among other factors, might play a role in the widespread tendency of subjects to overbid in most experimental auctions.
Author: Antonio Rosato
Publisher:
ISBN:
Category :
Languages : en
Pages : 250
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This dissertation consists of three chapters exploring the role that reference-dependent preferences and loss aversion play in auctions and negotiations. The first chapter characterizes the profit-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers, showing that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. When the products have similar social value, the seller maximizes profits by raising the consumers' reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-off), which the consumers buy if the bargain is not available to minimize their disappointment. The price difference between the bargain and the rip-off is larger when the products are close substitutes than when they are distant substitutes; hence dispersion in prices and dispersion in consumers' valuations are inversely related. The seller might prefer to offer a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available and are hence willing to pay a larger premium to reduce the uncertainty in their consumption outcomes. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The second chapter studies sequential first-price and second-price auctions when bidders are expectations-based loss-averse. A large body of empirical research in auctions documents that prices of identical products sold sequentially tend to decline across auctions (a phenomenon which has been dubbed "declining price anomaly" or "afternoon effect", as often later auctions take place in the afternoon whereas the first ones usually take place in the morning) . In this chapter I argue that expectations-based reference-dependent preferences and loss aversion provide an alternative, preference-based, explanation for the afternoon effect observed in sequential auctions. First, I show that when bidders have reference-dependent preferences, the equilibrium bidding functions are history-dependent, even if bidders have independent private values. The reason is that learning the type of the winner in the previous auction modifies a bidder's expectations about how likely he is to win in the current auction; and since expectations are the reference point, the optimal bid in each round is affected by this learning effect. More precisely, I identify what I call a "discouragement effect": the higher the type of the winner in the first auction is, the less aggressively the bidding behavior of the remaining bidders in the second auction. This discouragement effect in turn pushes bidders to bid more aggressively in the earlier auction. Moreover, the uncertainty about future own bids, due to the history-dependence of the equilibrium strategies, generates a precautionary bidding effect that pushes bidders to bid less aggressively in the first auction. The precautionary bidding effect and the anticipation of the discouragement effect go in opposite directions; when the latter effect is stronger, a declining price path arises in equilibrium. The third chapter studies the role of expectations-based reference-dependent preferences and loss aversion in a sequential bargaining game with one-sided incomplete information between a seller who makes all the offers and a buyer. I show that loss aversion eases the rent-efficiency trade-off for the seller who can now serve a larger measuer of consumers at an earlier stage. Thus, in equilibrium the seller achieves higher profits and we have less delay with loss aversion than without it. Furthermore, I also show that, besides increasing the seller's profit and overall trade efficiency, loss aversion also reallocates surplus among consumers by increasing the equilibrium payoff of some low-valuation buyers and decreasing that of high-valuation ones.
Author: Nicholas Shunda
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. The Buy-It-Now option on eBay is a leading example of an auction with a buy price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. Introducing a small reference-price effect can shrink the range of buy prices bidders are willing to exercise. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.
Author: John H. Kagel
Publisher: Princeton University Press
ISBN: 0691218951
Category : Business & Economics
Languages : en
Pages : 419
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An invaluable account of how auctions work—and how to make them work Few forms of market exchange intrigue economists as do auctions, whose theoretical and practical implications are enormous. John Kagel and Dan Levin, complementing their own distinguished research with papers written with other specialists, provide a new focus on common value auctions and the "winner's curse." In such auctions the value of each item is about the same to all bidders, but different bidders have different information about the underlying value. Virtually all auctions have a common value element; among the burgeoning modern-day examples are those organized by Internet companies such as eBay. Winners end up cursing when they realize that they won because their estimates were overly optimistic, which led them to bid too much and lose money as a result. The authors first unveil a fresh survey of experimental data on the winner's curse. Melding theory with the econometric analysis of field data, they assess the design of government auctions, such as the spectrum rights (air wave) auctions that continue to be conducted around the world. The remaining chapters gauge the impact on sellers' revenue of the type of auction used and of inside information, show how bidders learn to avoid the winner's curse, and present comparisons of sophisticated bidders with college sophomores, the usual guinea pigs used in laboratory experiments. Appendixes refine theoretical arguments and, in some cases, present entirely new data. This book is an invaluable, impeccably up-to-date resource on how auctions work--and how to make them work.
Author: Nicholas Shunda
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.
Author: Ángel Hernando-Veciana
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: A. Banerji
Publisher:
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Category :
Languages : en
Pages :
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Author: Peter McGee
Publisher:
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Category :
Languages : en
Pages : 102
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Abstract: Behavioral economics is the branch of the discipline that attempts to incorporate and explain data that appear to be at odds with traditional economic theory by appealing to psychological and cognitive phenomena. This dissertation addresses consumer decision making in various settings and examines the effects of factors outside the scope of standard economic models. Chapter 1 looks at the effect of an individual uncertainty over what a good is worth to them in the context of an auction. In a laboratory experiment with uncertainty over final values, 28% and 17% percent of bids in private-value English and first-price auctions, respectively, were above the subject's expected value of item - - behavior that cannot be explained by risk preferences. In both auction formats, a subset of bidders repeatedly bids above the expected value of the item. Prices in English are 13% percentage points higher in auctions with more than one bidder making bids at odds with elicited risk preferences ("overbidders") than in auctions with no bidders making such bids, but there are no differences between the prices in first-price auctions with different numbers of overbidders. In contrast to earlier findings with certain values, the revenues in English and first-price auctions with more than one overbidder are not statistically different from one another. Chapter 2 examines the impact of theoretically unimportant incentives on auction behavior. Bidding one's value in a second-price, private-value auction is a dominant solution (Vickrey, 1961). However, repeated experimental studies find much more overbidding than underbidding, resulting in overbidding on average. Our experimental work introduces manipulations against which the dominant strategy is immune, yet they affect bidding in a predictable way. Our finding suggests that although subjects fail to discover the dominant strategy, they nevertheless respond sensibly to the "steepness" of payoffs out of equilibrium. These results lend support to existing models such as QRE which assume that less than fully rational players will respond to out of equilibrium incentives in a systematic way, even though the full effect of our manipulations is not explained by these models. We suggest a new model that can explain these results. Chapter 3 delves search behavior. That consumers search more in response to an increase in prices than to a decrease in prices has been documented and motivated a great deal of theoretical research. Models generating this asymmetric consumer search do so by assuming imperfect consumer information about the price distribution and/or heterogeneous costs of search. I demonstrate that such assumptions are unnecessary by showing that subjects search asymmetrically after price distribution shifts in a laboratory experiment in which subjects know the price distribution and face a common cost of search. Subjects who experience an upward shift in the price distribution are 6 percentage points more likely to search than subjects who experience either no shift in prices or a downward shift. An alternative model of reference-dependent preferences in which consumers view potential purchases as "losses" or "gains" relative to a reference price generates asymmetric search.
Author: Isabelle Brocas
Publisher:
ISBN:
Category : Auctions
Languages : en
Pages : 30
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We conduct a laboratory experiment of second-price sealed bid auctions of a common value good with two bidders. Bidders face three different types of information: common uncertainty (unknown information), private information (known by one bidder) and public information (known by both bidders), and auctions differ on the relative importance of these three types of information. We find that subjects differentiate insufficiently between private and public information and deviate from the theoretical predictions with respect to all three types of information. There is under-reaction to both private and public information and systematic overbidding in all auctions above and beyond the standard winner's curse. The Cursed Equilibrium and Level-k models successfully account for some features of the data but others remain unexplained.
Author: Harry J. Paarsch
Publisher: Department of Economics, University of British Columbia
ISBN:
Category : Auctions
Languages : en
Pages : 40
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