Reference Price Effects in First-price Private-value Auctions

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.