Sequential Auctions with Informational Externalities and Aversion to Price Risk: Decreasing and Increasing Price Sequences

Abstract

A large body of empirical research has shown that prices of identical goods sold sequentially sometimes increase and often decline across rounds. This article introduces a tractable form of risk aversion, called aversion to price risk, and shows that declining prices arise naturally when bidders are averse to price risk. When there are informational externalities, there is a countervailing effect which pushes prices to raise along the path of a sequential auction, even if bidder's signals are independent. The article shows how to decompose the effect of aversion to price risk from the effect of informational externalities.