Abstract
The paper presents a complete information model of bidding in second price sealed-bid and ascending-bid (English) auctions, in which potential buyers know the unit valuation of other bidders and may spitefully prefer that their rivals earn a lower surplus. Bidders with spiteful preferences should overbid in equilibrium when they know their rival has a higher value than their own, and bidders with a higher value underbid to reciprocate the spiteful overbidding of the lower value bidders. The model also predicts different bidding behavior in second price as compared to ascending-bid auctions. The paper also presents experimental evidence broadly consistent with the model. In the complete information environment, lower value bidders overbid more than higher value bidders, and they overbid more frequently in the second price auction than in the ascending price auction. Overall, the lower value bidder submits bids that exceed value about half the time. These patterns are not found in the incomplete information environment, consistent with the model.
Highlights
One of the most basic and apparently innocuous assumptions about behavior in games is that players will adopt dominant strategies
“Japanese” version of ascending-bid auction [10,11], which is isomorphic to the second price auction, the equilibrium bidding strategy is more transparent, which has led some researchers to conclude that the subtlety of the dominant strategy in the sealed bid second-price auction is a primary reason some bidders fail to follow it
We have investigated bidding behavior in both complete and incomplete information environments for two-person second price sealed-bid auctions and ascending-bid auctions for a single indivisible object with independent private values
Summary
One of the most basic and apparently innocuous assumptions about behavior in games is that players will adopt dominant strategies. They consider first and second price auctions, all with four competing bidders, and test predictions regarding equilibrium strategies in three different information structures Their results provide strong support for theory, but they observe overbidding by lower value bidders in their second price auctions that is consistent with a spite motive. In equilibrium these spiteful social preferences substantially reduce the size of the set of Nash equilibria This combination of spite and reciprocity is the reason that isomorphism fails for the second price and ascending price auction, and the particular pattern of larger and more frequent overbids in the second price auction predicted by the model is observed in the experimental data
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