First Price Sealed-Bid Auctions with Bidders’ Heterogeneous Risk Behavior: An Adversarial Risk Analysis Approach

Abstract

Bidders’ bidding behavior is analyzed in first price sealed-bid (FPSB) auctions using an adversarial risk analysis (ARA) framework. However, using nonstrategic play and level-k thinking solution concepts, modeling is performed by assuming only two bidders. Also, the aleatory and concept uncertainties have not been yet taken into account by using an ARA framework for these auctions. In this paper, we apply an ARA approach to model bidders’ bidding behavior in a more realistic way for FPSB auctions. We assume n bidders that may have different wealth and heterogeneous risk behaviors. We use nonstrategic play and level-k thinking solution concepts, and we take into account aleatory uncertainty in addition to epistemic uncertainty. Finally, concept uncertainty is taken into account to find ARA solutions for these auctions. We also provide numerical examples to illustrate our methodology.