English auctions with resale: An experimental study

Abstract

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.