A Study of Bidding Behavior in All-Pay Auctions

Abstract

The all-pay auction, where every bidder pays his highest bid, is an increasingly popular auction format with the potential to generate higher revenues. In a field study, we investigate bidding strategies and revenue implications in simultaneous paired auctions that involve identical products in two different auction formats -- winner-pay and all-pay formats in charity and non-charity settings. Our auctions run in an online environment with the realistic feature that sellers cannot fully enforce payment compliance from non-winning bidders. We find that the all-pay format generated substantially higher revenue than the winner-pay format. This is despite the fact that winning prices were lower in the all-pay format and only about half of the pledges by losing bidders are eventually paid. We find important differences in the bidding behavior between paying and non-paying losing bidders. In particular, non-paying bidders tend to bid more aggressively, placing more bids, placing them later and bidding higher amounts. To characterize bidding strategy, we study bid timing, auction choice and jump bidding. We find evidence that bidders in all-pay auctions use rational bidding strategies that are effective in these settings such as early jump bidding and late incremental bidding. In the all-pay auctions, early jump bidding can deter entry by others and late incremental bidding can reduce commitment. In the winner-pay auctions, such strategies are not effective and we observe them to a lesser extent.