Abstract
External reference points, such as outside options or budget constraints, are common in bidding environments. We experimentally investigate the impact of external reference points for bidding in first-price auctions with independent private values. We find that the presence of a reference point distorts bidding behaviour. There are “reference price effects” consistent with a preference for certainty and anchoring bias. To establish robustness, we conduct a second experiment that controls for bidders’ first-order beliefs. After controlling for beliefs, the reference price effect dominates. We observe that the imposition of a ceiling on the opponent’s maximum bid set at the upper bound of the risk-neutral Nash equilibrium support is strong enough to reverse the well-documented pattern of overbidding in first-price auctions and indeed to induce significant underbidding. The findings inform on the implications of auction formats that involve reference points, and specifically buy-it-now price options that are common in internet auction listings.
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