The Loser’s Bliss in Auctions with Price Externality

Ernan Haruvy,Peter Popkowski Leszczyc

doi:10.3390/g6030191

Abstract

We consider auctions with price externality where all bidders derive utility from the winning price, such as charity auctions. In addition to the benefit to the winning bidder, all bidders obtain a benefit that is increasing in the winning price. Theory makes two predictions in such settings: First, individual bids will be increasing in the multiplier on the winning price. Second, individual bids will not depend on the number of other bidders. Empirically, we find no evidence that increasing the multiplier increases individual bids in a systematic way, but we find that increasing the number of bidders does. An analysis of individual bidding functions reveals that bidders underweight the incentives to win and overweight the incentives to lose.

Highlights

Auctions play a prominent role in charity fundraising, with billions collected through hundreds of thousands of silent and live auctions in the US alone [1]
Internet auctions with price externality in particular are on the rise, with eBay dedicating a special section for charity auctions
We begin with the analysis of the SPSB format, because in that format, we observe the uncensored bids by all bidders, which is essential for the first part of hypothesis 1 pertaining to comparisons of individual bids

Summary

Introduction

Auctions play a prominent role in charity fundraising, with billions collected through hundreds of thousands of silent and live auctions in the US alone [1]. Internet auctions with price externality in particular are on the rise, with eBay dedicating a special section for charity auctions Do these auctions play an important role for non-profit organizations, but an increasing number of for-profit firms. In the literature on auctions with price externality, charitable bidders are typically modeled as maximizing an objective function in which they receive additional utility that is increasing in the final price paid in the auction (i.e., the amount of money going to charity). This is equivalent to an auction where the losing bidder cares about the price paid by the winning bidder [11]. We refer to this class of auctions as auctions with price externality

Methods

Results

Conclusion