Average Bids Research Articles

Mimetic Dominance and the Economics of Exclusion: Private Goods in Public Context

We propose a simple mechanism of mimetic dominance whereby a person’s valuation for consuming an object or possessing an attribute is increasing in others’ unmet desire for it. Such mimetic preferences help explain a host of market anomalies and generate novel predictions in a variety of domains. In bilateral exchange, people exhibit a social endowment effect, and there is an increased demand for goods that become relatively more scarce. A classic monopolist earns excess profit by randomly excluding some people from being able to purchase the product. We test the predictions of the model empirically across several exchange environments. When auctioning a private good, we find that randomly excluding people from the opportunity to bid substantially increases average bids amongst those who retain this option. Furthermore, exclusion leads to greater expected revenue than increasing competition through inclusion. This effect is absent when bidders know that those who are excluded have lower desires for the good. We demonstrate that mimetic preferences matter even for basic exchange: a person’s demand for a good increases substantially when others are explicitly excluded from the opportunity to buy the same kind of good. Mimetic preferences have implications for both price and non-price based methods of exclusion: the model predicts Veblen effects, rationalizes attitudes against redistribution and trade, and provides a novel motive for social stratification and discrimination.

Anatomy of Public Procurement

We provide novel stylized facts about competition, bidding, entry and bidders across a wide spectrum of public procurement auctions using comprehensive and rich Finnish data. Competition for publicly procured contracts is relatively low with a median bidder count of two (three conditional on receiving any bids). Bidders typically are very heterogeneous in size, which likely limits competition further. Competition seems to work roughly as expected as on average (standardized) bids mainly decrease with the number of actual and potential bidders. Using information on registrations as a good proxy for potential bidders, we show that the ratio of actual to potential bidders increases with the number of actual bidders. We also show that being present in the contracting authority's municipality or province correlates positively with registering, entry (bidding) and winning, but other firm characteristics matter less. While attracting more competition by means of contract and auction rule design is a desirable policy goal and we show suggestive evidence that the use of scoring rule can be an entry barrier, increasing competition may be in practice difficult. Therefore, reservation prices may be a more useful policy tool to alleviate issues associated with the lack of competition.

Consumer preferences for aquaponic produce: Implications from an experimental auction

AbstractAquaponics is the integration of aquaculture and hydroponics to grow fish and plants together in one system. Many producers in the northern United States are attracted to aquaponics for its potential to produce indoors year‐round. However, little is known about consumer preferences for products grown in aquaponic systems. To address this knowledge gap, we conducted an experimental auction to measure the impact of information about production method on consumers’ willingness‐to‐pay (WTP) for lettuce. For most participants, WTP was similar for both aquaponic and soil grown lettuce with overall average bids of $1.47 per 8 ounces and $1.48 per 8 ounces, respectively. Learning how samples were grown (either aquaponic or soil‐grown) rarely changed bids significantly, although on average, participants with environmental group membership lowered their bids for aquaponic lettuce samples. In general, higher frequency shoppers expressed higher average WTP for all types of lettuce. [Q100 Agriculture: General, Q220 Renewable Resources and Conservation: Fishery; Aquaculture]

Conservation Auctions, Collusion and the Endowment Effect

We contribute to the literature on the optimal design of auction mechanisms for the procurement of nature conservation activities. We use an economic experiment to examine whether the market efficiency of conservation auctions increases or decreases with repetition. Theory predicts that repetition facilitates collusion among sellers in procurement auctions, while behavioral economics suggests that repetition may increase market efficiency because it attenuates the endowment effect - the phenomenon that ownership of a good tends to increase one's valuation of the good. We find that of these two countervailing effects, the latter has the upper hand; average bids decrease monotonically over the consecutive auctions. Since repetition increases market efficiency, conservation contracts can be of shorter duration and procured at a higher frequency than has been suggested before.

Release of Construction Clients’ Pre-tender Cost Estimates: An Experimental Study

Clients engage consultant quantity surveyors or cost engineers to perform project cost estimates before calling for tender submissions. This experimental study examines the impact of releasing the clients’ pre-tender cost estimates prior to bidding on student subjects’ bidding behavioural patterns, and the extents to which their bidding tends to agree with the behavioural patterns proposed by Milgrom and Weber’s theory. The results show that the provision of clients’ pre-tender cost estimates prior to bidding does affect bidders’ bidding behaviour. Bidders with access to the clients’ pre-tender cost estimates prior to bidding, on average, recorded lower bids than those with no access to the estimate. However, the lower average bids do not result in statistically significant lower winning bids. These findings provide evidence in support of Milgrom and Weber’s theory, demonstrating the practicality of an experimental approach using student subjects for testing theories in building economics research. The practical implication is that construction clients would need to consider their information policy on releasing pre-tender cost estimates to enhance efficiency in their procurement for construction services.

PROPERTY RIGHTS AND LOSS AVERSION IN CONTESTS

We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three situations: in “gain” two players start with no prize and make sunk bids to win a prize; in “loss” both the players start with prizes and whoever loses the contest loses their prize; and in “mixed” only one player starts with a prize that stays with him if he wins, but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility and the standard loss aversion models predict no difference in bids across treatments. We introduce a loss aversion model in which the property rights are made salient, and as a result the reference point varies across treatments. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. There is no significant difference in bids in the loss (gain) treatment and bids by property rights holder (nonholder) in the mixed treatment. A model incorporating both loss aversion and social preferences explains this result. (JEL C91, C72, D23, D74)

Experimental Comparison of First-Price Auction Formats: Sealed-Bid versus Ascending Deadline

The present study reports experimental comparison between two different first price auction formats; sealed bid (SB) and ascending price (AP). To compare the difference between two formats, we adopt within subject assignment for experimental participants. The results show that the average bids of AP is significantly smaller than that of SB.

An externality-robust auction: Theory and experimental evidence

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players' motives to affect other players' monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.

Construction Procurement: Modelling Bidders’ Learning in Recurrent Bidding

Construction remains a significant area of public expenditure. An understanding of the process of changes in construction pricing, and how the process can be manipulated through the release of bidding feedback information is vital, in order to best design clients’ procurement policies. This paper aims to statistically model inexperienced individual bidders’ learning in recurrent bidding under partial and full information feedback conditions. Using an experimental dataset, the developed linear mixed model contains three predictor variables, namely: time factor, information feedback conditions, and bidding success rate in the preceding round. The results show nonlinearity and curvature in the bidders’ learning curves. They are generally less competitive in time periods after a winning bid with lower average bids submitted by those subjected to full information feedback condition. In addition, the model has captured the existence of heterogeneity across bidders with individual-specific parameter estimates that demonstrate the uniqueness of individual bidders’ learning curves in recurrent bidding. The findings advocate for adequate bidding feedback information in clients’ procurement design to facilitate learning among contractors, which may in turn lead to increased competitiveness in their bids.

Green auctions and reduction of information rents in payments for environmental services: an experimental investigation in Sunan County, northwestern China.

Reducing information rents is an important task for government agencies wishing to purchase maximal environmental services with limited budgets. This paper reports on several green auction options for reducing information rents and improving the performance of the “Grain for Green” Payments for environmental services (PES) program implemented in northwestern China. In r experimental auctions and investigations, door-to-door interviews were conducted and bidding envelopes and survey questionnaires were used to determine the offers and the foregone profits of the participants. Three scenarios are analyzed in this paper: a uniform price auction, a discriminatory price auction, and an opportunity-cost system. The results show that compared to the uniform price auction system, the other auction systems can increase the cost-effectiveness of conservation contracting. Competitive bidding can reveal true opportunity costs and can reduce information rents extracted from the government by farmers using private information. The demographics and average bids of these auction types were also analyzed. “Perfect information” in the opportunity-cost offer system has the best performance but is very hard to implement in reality. The results of this research show that the auction is a valuable tool for purchasing conservation contracts in northwestern China, but that in the future, the performance of these auctions should be studied with relaxed model assumptions.

Information feedback and bidders’ competitiveness in construction bidding

Purpose– Contractors rely on effective pricing methods in order to translate potential business into reality for long-term survival of their firms. This involves effective utilization of bidding feedback information toward winning jobs with high profit potential. The purpose of this paper is to experimentally investigate student (inexperienced) bidders’ competitiveness under full and partial information feedback conditions when the number of competing bidders is large (n=12).Design/methodology/approach– This paper adopted an experimental research design. The design used between-subjects variation and involved information feedback as the treatment variable with 120 students who enrolled in a cost-estimating course participated in the experiment.Findings– The result shows that the variations in bids over time for both levels of information feedback are statistically significant. It is found that bidders with full bidding feedback information are more competitive than those with partial bidding feedback information. The bid-spread analysis and the identified effect of these two information feedback conditions on awarded contract sum, provide some further evidence that full information feedback condition would lead to lower average bids in construction bidding.Practical implications– The implication of the findings for construction clients is that they should provide as much bidding feedback information as possible so that the bid prices will be competitive.Originality/value– Given the ambiguity inherent in field data, this paper provides strong justification of using experimental research design in advancing the understanding of construction pricing under different information feedback conditions. In addition, it demonstrated the suitability of using student subjects in similar experiments in the context of construction bidding.

An Externality-Robust Auction: Theory and Experimental Evidence

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players’ motives to affect other players’ monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.

Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game

The paper reports experimental data on the behavior in the first-price sealed-bid auction for a varying number of bidders when values and bids are private information. This feedback-free design is proposed for the experimental test of the one-shot game situation. We consider both within-subjects and between-subjects variations. In line with the qualitative risk neutral Nash equilibrium prediction, the data show that bids increase in the number of bidders. However, in auctions involving a small number of bidders, average bids are above, and in auctions involving a larger number of bidders, average bids are below the risk neutral equilibrium prediction. The quartile analysis reveals that bidding behavior is not constant across the full value range for a given number of bidders. On the high value quartiles, however, the average bid–value ratio is not different from the risk neutral prediction. The behavior is different when the winning bid is revealed after each repetition.

Bidding behavior and experience in internet auctions

We study the role of experience in internet art auctions by analyzing repeated bidding by the same bidder in a unique longitudinal field dataset. Our results show that experience significantly lowers the level of bids suggesting that bidders change their bidding behavior throughout time. Participating in more than ten auctions brings down average bids by up to 26%. We further test several possible explanations for the observed learning behavior and show that the change in bidding strategy is a result of a change in within-auction behavior that is generated with experience. Our results are robust to concerns of endogenous participation as well as bidder fixed effects.

An Externality-Robust Auction: Theory and Experimental Evidence

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players' motives to affect other players' monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.

Bidding Behavior in Descending and Ascending Auctions

This research examines how individual differences and institutional practices influence consumer bidding in auctions. Bidders may be motivated by different goals, e.g., thrill (of winning the item, with minimal attention to what they pay for it) versus prudence (winning the item at a price at or below its perceived value). Also, innate or auctioneer-induced differences may exist in the precision and salience of bidder cognitions about the item's value. We report two studies on how these motivational and cognitive factors influence bids in descending and ascending auctions, respectively. Each study also manipulated a situational variable (wait time at each price step). The two auctions realized different average prices for the same item set. Average bids were higher in the descending (versus ascending) auction in several study conditions. In both auction formats, bidders primed with thrill (versus prudence) bid higher, but more precise and/or salient values attenuated this goal effect. Among other results, in the descending auction, longer wait times elicited higher bids from bidders primed with thrill (but not prudence). In the ascending auction, longer wait times produced lower bids for bidders primed with prudence (but not thrill). These findings on consumer bidding behavior have practical implications for auction design.

Experimental tests of Tullock’s contest with and without winner refunds

We examined experimentally the two-agent, complete-information Tullock’s contest, with and without refund for the winner. We find that the average bids in the refund group are higher than the average bids in the group without a refund, consistent with the theory. However, the auctioneer does not increase his profit if he changes the design of the contest by reimbursing the winner’s cost of effort. We also find underbidding for the low-valuation players and overbidding for the high-valuation player in a contest with a refund. Some players chose the corner solution of staying out of the game by biding zero.

Tiger Women: An All-Pay Auction Experiment on Gender Signaling of Desire to Win

Tiger Women: An All-Pay Auction Experiment on the Gender Heuristic of the Desire to Win DAVID ONG AND ZHUOQIONG (CHARLIE) CHEN Prior work has shown that lack of familiarity could prevent people from playing mixed strategy Nash equilibrium (MNE) as well as drive overbidding in first price and all-pay auctions, and Tullock contests. However, these prior works did not reveal anything about opponents and thus, could not thereby induce the systematic variations necessary to reactions to beliefs about opponents risk attitudes and valuations. We hypothesized that gender was a familiar heuristic for risk attitude and valuation in real life competitions. We informed subjects of the tested for gender differences in desire to win by measuring willingness to pay to win in female (F) vs. male (M), M vs. F, F vs. F, and M vs. M all-pay auctions. We found a very tight fit with MNEs. Though, like prior Tullock contest and first price auction experiments, women bid higher than men. We found that their payoffs were weakly higher , consistent with strategic high bidding rather than overbidding. We derived theory to separate the effects of gender differences in valuation and risk attitude on average bids across treatments. Our data indicate that women have a higher valuation for winning than men. We discuss risk attitude and other possible confounds in standard measures of gender differences in competitive attitude and our possible contributions to that literature.

Regret and Feedback Information in First-Price Sealed-Bid Auctions

We investigate the effect of regret-related feedback information on bidding behavior in sealed-bid first-price auctions. Two types of regret are possible in this auction format. A winner of the auction may regret paying too much relative to the second highest bid, and a loser may regret missing an opportunity to win at a favorable price. In theory, under very general conditions, being sensitive to winning and paying too much should result in lower average bids, and being sensitive to missing opportunities to win at a favorable price should result in higher bids. For example, the U.S. Government's policy of revealing losing bids may cause regret-sensitive bidders to anticipate regret and bid conservatively, decreasing the government's revenue. We test these predictions in the laboratory and find strong support for both.

Entry decisions and bidding behavior in sequential first-price procurement auctions: An experimental study

Though many real life auctions are run independently of each other, from the bidders' point of view they often form sequences of auctions. We investigate how behavior responds to the additional incentives that are present in such auction sequences. Comparing subjects' decisions in single first-price procurement auctions with their decisions in a game consisting of two subsequent first-price procurement auctions, we find that, in line with the theoretical prediction, entry and bidding behavior is crucially affected by the opportunity cost of early bid submission. Though, entry decisions and average bids in the auction sequence systematically deviate from the perfect Bayesian equilibrium prediction. While the nature of the opponent (human being or computer) has no significant effect on these findings, giving subjects additional feedback on winners and prices seems to reduce the deviations from the equilibrium prediction.