English Auction Research Articles

Bidding in private-value auctions with uncertain values

Auctions are often used to sell idiosyncratic goods difficult for potential bidders to value ex ante. Laboratory auctions with uncertainty over final values in this experiment resulted in 18% and 27% of bids above the expected value of the item in private-value first-price and English auctions, respectively. Risk-seeking preferences as measured on an individual decision task cannot explain overbidding and the first-price auction results suggest that risk aversion may not be a good explanation for bidding behavior observed with certain values. Several candidate explanations fail to explain overbidding, rather it appears to stem from some bidders who are prone to overbidding. Relative to first-price auctions, the size and frequency of overbids are significantly larger in English auctions, while more English auctions are won by overbidders. Differences between the formats appear to be driven by the dynamic nature of English auctions which is consistent with popular notions of “auction fever.”

Theoretical and experimental analysis of auctions with negative externalities

We investigate a private value auction in which a single “entrant” on winning imposes a negative externality on two “regular” bidders. In an English auction when all bidders are active, “regular” bidders free ride, exiting before price reaches their values. In a first-price sealed-bid auction incentives for free riding and aggressive bidding coexist, limiting free riding compared to the English auction. We find substantial, though incomplete, free riding in the clock auction. In first-price auctions, regular bidders bid more aggressively than the “entrant” and both bid higher than in auctions with no externality. Predictions regarding revenue, efficiency, and successful entry between the two auctions are satisfied.

When the Economics of a Decision Matter More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever

This article uses archival data from English auctions of animal art and eBay gift cards coupled with two laboratory experiments to study the effect of financial stakes on an interdependent decision-making phenomenon critical to organizational success: auction fever. Congruent with rational irrationality theory, we find evidence that the frequency and severity of auction fever decreases as the stakes increase, calling into question the economic significance of the phenomenon. In Study 1, we used two archival field datasets to show that the frequency and magnitude of overbidding decrease as the bidder’s willingness to pay increases. In Study 2 a laboratory experiment replicated this finding as winners make up a minority (only 15.2%) of overbidders, making losers (who incur no cost for overbidding) four-and-half times more likely to experience “auction fever”. In Study 3, we compare the frequency of auction fever between an English auction institution (where only the winner pays) and penny auction institution (where every bidder pays) – and find that the frequency of auction fever declines from 33% in English auctions to 12.7% in penny auctions. In contrast to the English auctions, bidders in the penny auction were more likely to spend beyond their initial limits when their (perceived) item values were higher; this occurs because the cost of each additional bid is smaller relative to the perceived value of the item. These results demonstrate that financial stakes of a decision may override seemingly robust psychological processes and they encourage researchers to test their ideas in contexts where the economic significance of a decision is considerable.

“Upping the ante”: how to design efficient auctions with entry?

Of primary importance in auction design is the set of strategies available to the seller at the auction stage. We first formalize hold‐up regarding entry costs that preys on second‐price auctions when the seller may engage in a costly shill‐bidding activity. We derive the optimal reserve and show how shill bidding can make posted prices outperforming auctions. Second, we advocate for a new regulation where shills would be banned but with the possibility of canceling sales ex post, which offers some valuable flexibility: the English auction with jump bids implements, then, the first best in general environments.

Multi-item Vickrey–English–Dutch auctions

Assuming that bidders wish to acquire at most one item, this paper defines a polynomial time multi-item auction that locates the VCG prices in a finite number of iterations for any given starting prices. This auction is called the Vickrey–English–Dutch auction and it contains the Vickrey–English auction [Sankaran, J.K., 1994. On a dynamic auction mechanism for a bilateral assignment problem. Math. Soc. Sci. 28, 143–150] and the Vickrey–Dutch auction [Mishra, D., Parkes, D., 2009. Multi-item Vickrey–Dutch auctions. Games Econ. Behav. 66, 326–347] as special cases. By means of numerical experiments, it is showed that when the auctioneer knows the biddersʼ value distributions, the Vickrey–English–Dutch auction is weakly faster than the Vickrey–English auction and the Vickrey–Dutch auction in 89 percent and 99 percent, respectively, of the investigated problems. A greedy version of the Vickrey–English–Dutch auction is demonstrated to perform even better in the simulation studies.

A Novel Electronic English Auction System With a Secure On-Shelf Mechanism

With the advances of network technology, electronic auctions have become increasingly popular in recent years. In 2012, Xiong proposed a bidder-anonymous auction scheme based on revocable ring signature to enhance the computation efficiency and provide a dispute protocol. Nevertheless, we find that it has design weaknesses and is vulnerable to denial-of-service attacks. Furthermore, in an actual electronic auction system such as Yahoo! and eBay, a user can play the role of not only a bidder, but also an auctioneer. Considering the essentiality of the discussion of the secure products on-shelf process for auctioneers, we design a new electronic auction system with a secure on-shelf mechanism in this paper. In our system, users can freely participate in or host an auction if and only if they have registered at the agent center. Analyses demonstrate that our auction system not only resolves the problems in Xiong 's scheme, but also provides more features with higher security.

Arriving in Time: Estimation of English Auctions With a Stochastic Number of Bidders

We develop a new econometric approach for the estimation of second-price ascending-bid auctions with a stochastic number of bidders. Our empirical framework considers the arrival process of new bidders as well as the distribution of bidders’ valuations of objects being auctioned. By observing the timing of bidder arrival, the model is identified even when the number of potential bidders is stochastic and unknown. The relevance of our approach is illustrated with an empirical application using a unique dataset of art auctions on eBay. Our results suggest a higher impact of sellers’ reputation on bidders’ valuations than previously reported in cross-sectional studies but the impact of reputation on bidder arrival is largely insignificant. Interestingly, a seller’s reputation impacts not only the actions of the bidders but the actions of the seller as well. In particular, experience and a good reputation increase the probability of a seller posting items for sale on longer-lasting auctions, which we find increases the expected revenue for the seller. Supplementary materials for this article are available online.

AUCTION DESIGN WITHOUT COMMITMENT

In anonymous platforms like the Internet, committing to honor the outcome of an auction is difficult since the seller can benefit by reauctioning the good. We argue that how information is processed within the auction mechanism is crucially important in such circumstances. In our model, the seller uses an intermediary to extract information from the buyers but is not tied to sell the good with terms that the mechanism proposes. Instead, she may reauction the good again via some other intermediary. There are no restrictions on how many times and through which mechanisms the good can be reauctioned. The buyers may also choose their outside option at any stage of the game. We argue that a sequentially rational seller can only implement a version of the English auction, in particular the popular version where bidders employ proxy bids. This is a consequence of the informational properties of the English action: it reveals just the right information for the seller to be able to commit to the mechanism. (JEL: C72, D44, D78)

The Responsiveness of Tax Lien Investors in English Auctions to Matching Rules: Evidence from Illinois

Auctions allowing competitors to match the current high bid are thought to be suboptimal, particularly compared to auctions where new bids must exceed the current high bid (Milgrom, 2004). To date no study has examined, empirically, the effect of allowing matching bids. A recent policy innovation in Illinois provides an opportunity to estimate the effect of matching on winning bids. Using administrative data from five suburban Illinois counties on the auction of 127,073 liens, we find that an English auction design that allows matching is associated with higher winning bids when compared to an English design that does not allow matching. These higher winning bids increase interest fees on tax delinquent property owners by 20 percent. The paper is the first to estimate the cost of matching on auction outcomes.

Empirical Evidence on the Impact of Reserve Prices in English Auctions

We study the impact of reserve prices on the revenue of English auctions using a unique hand‐collected database of virtual football players from the online football management game Hattrick. As theoretically predicted, setting a reserve price entails a trade‐off between the cost of setting it too high and having the good go unsold, and the benefit associated with a higher revenue should the reserve price successfully extract surplus from the highest bidder. Overall, we find the net benefit of setting a higher reserve price to be negative, regardless of the value of the reserve price. This is a novel result insofar as previous literature has generally found an insignificant or positive effect of the reserve price on unconditional auction revenue.

Second chance offers in auctions

This paper examines situations in which a seller might make a second chance (take-it-or-leave-it) offer to a non-winning bidder at a price equal to their bid at auction. This study is motivated by the take-it-or-leave-it second chance offer rules used by eBay and a number of state procurement agencies. Equilibrium bidder behavior is determined for IPV sealed bid first price, second price, English, and Vickrey auctions when a second chance offer will be made with an exogenous probability \(p\). In all but the Vickrey auction (which elicits the dominant strategy of bidding one’s value) equilibrium bids are lower than if there were no possibility of a second chance offer and higher than if a second chance offer will be made for certain. Further, the possibility of a second chance offer erodes the strategic equivalence between second price bids and English auction drop out levels. If bidders are risk averse (with CRRA preferences), this difference leads to expected revenue dominance of the second price over the English auction, both of which dominate the Vickrey auction. The first price auction is also shown to revenue dominate the Vickrey auction, and moreover, numerical results and intuition from existing literature suggest that the first price auction revenue dominates the second price auction.

An Experimental Investigation of Auctions and Bargaining in Procurement

In reverse auctions, buyers often retain the right to bargain further concessions from the winners. The optimal form of such procurement is an English auction followed by an auctioneer's option to engage in ultimatum bargaining with the winners. We study behavior and performance in this procurement format using a laboratory experiment. Sellers closely follow the equilibrium strategy of exiting the auction at their costs and then accepting strictly profitable offers. Buyers generally exercise their option to bargain according to their equilibrium strategy, but their take-it-or-leave-it offers vary positively with auction prices when they should be invariant. We explain this deviation by modeling buyers' subjective posteriors regarding the winners' costs as distortions of the Bayesian posteriors, calculated using a formulation similar to a commonly used probability weighting function. We further test the robustness of the experimental results and the subjective posterior explanation with three additional experimental treatments. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1880 . This paper was accepted by Teck-Hua Ho, behavioral economics.

Arriving in Time: Estimation of English Auctions with a Stochastic Number of Bidders

We develop a new econometric approach for estimation of second-price ascending-bid auctions with a stochastic number of bidders. Our empirical framework considers the arrival process of new bidders as well as the distribution of bidders’ valuations of objects being auctioned. By observing the timing of bidder arrival the model is identified even when the number of potential bidders is stochastic and unknown. The relevance of our approach is illustrated with an empirical application using a unique dataset of art auctions on eBay. Our results suggest a higher impact of sellers’ reputation on bidders’ valuations than previously reported in cross-sectional studies but the impact of reputation on bidder arrival is largely insignificant. Interestingly, a seller’s reputation impacts not only the actions of the bidders but the actions of the seller as well. In particular, experience and a good reputation increase the probability of a seller posting items for sale on longer-lasting auctions which we find increases the expected revenue for the seller.

Auctions with a profit sharing contract

An auction is used to sell a resource that is then developed by the winning buyer to generate a profit. Two forms of payment are considered: (i) charging the winning buyer a one-time payment; (ii) charging an initial payment followed by a profit sharing contract (PSC) that divides the realized profit between the seller and the winning buyer. A symmetric interdependent values model with a risk neutral seller and either risk averse or risk neutral buyers is considered, along with the second price and English auctions. The properties of those PSCs in which either positive profits or both profits and losses are split according to a fixed fraction are studied. The sellerʼs expected revenue is shown to be larger in a class of general PSCs with nontrivial profit sharing than in an auction with only a one-time payment.

Bidding in Private-Value Auctions with Uncertain Values

Auctions are often used to sell idiosyncratic goods that may be difficult for potential bidders to value ex ante. In a laboratory experiment with uncertainty over final values, 18% and 27% of bids in private-value first-price and English auctions, respectively, were above the expected value of item. This overbidding cannot be explained by learning, mistakes, or risk preferences as measured on an individual decision task. The evidence suggests that overbidding is due to some bidders who are prone to overbidding. The stylized fact from the experimental literature that bids in first-price auctions with certain values are above the risk-neutral Nash equilibrium but below the bidder's value is often explained by modeling risk-averse bidders, but the overbidding with uncertain values provides strong evidence that risk aversion is not a good explanation for the bidding behavior in first-price auctions. In English auctions, the size and frequency of overbids are significantly larger than in first-price auctions, while more bidders overbid in more English auctions and more English auctions are won by overbidders than first-price auctions. This behavior is consistent with popular notions of 'auction fever,' which has not been observed in laboratory experiments with certain values.

Jump bidding and overconcentration in decentralized simultaneous ascending auctions

A model of English auctions is proposed to incorporate the possibility of jump bidding. When two objects are sold separately via such auctions, bidders signal their willingness to pay via jump bids, thereby forming rational expectations of the prices without relying on any central mediator. Hence a multi-item bidder does not suffer the exposure problem of having to buy an item while he is uncertain about the price of its complement. Single-item bidders, however, free-ride one another in competing against a multi-item bidder. Consequently, the auctions overly concentrate the goods to a multi-item bidder and never overly diffuse them to single-item bidders.

DECLARATIVE SPECIFICATION OF FAULT TOLERANT AUCTION PROTOCOLS: THE ENGLISH AUCTION CASE STUDY

Auction mechanisms are nowadays widely used in electronic commerce Web sites for buying and selling items among different users. The increasing importance of auction protocols in the negotiation phase is not limited to online marketplaces. In fact, the wide applicability of auctions as resource-allocation and negotiation mechanisms have also led to a great deal of interest in auctions within the agent community. A challenging issue for agents operating in open Multiagent Systems (such as the emerging semantic Web infrastructure) concerns the specification of declarative communication rules which could be published and shared allowing agents to dynamically engage well-known and trusted negotiation protocols. To cope with real-world applications, these rules should also specify fault tolerant patterns of interaction, enabling negotiating agents to interact with each other tolerating failures, for instance terminating an auction process even if some bidding agents dynamically crash. In this paper, we propose an approach to specify fault tolerant auction protocols in open and dynamic environments by means of communication rules dealing with crash failures of agents. We illustrate these concepts considering a case study about the specification of an English Auction protocol which tolerate crashes of bidding agents and we discuss its properties. © 2012 Wiley Periodicals, Inc.

A Point Decision for Partially Identified Auction Models

This paper proposes a decision theoretic method to choose a single reserve price for partially identified auction models, such as [Haile and Tamer, 2003], using data on transaction prices from English auctions. The paper employs [Gilboa and Schmeidler, 1989] for inference that is robust with respect to the prior over unidentified parameters. It is optimal to interpret the transaction price as the highest value, and maximize the posterior mean of the seller’s revenue. The Monte Carlo study shows sub- stantial gains relative to the revenues corresponding to a random point and the midpoint in the Haile and Tamer interval.

Speculation and demand reduction in English clock auctions with resale

Many auctions are followed by a resale market which occurs when the winner of the auction resells the item won to one of the participants from the original auction. The existence of such transactions may initially appear counter intuitive. However, this paper will show that active inter-bidder resale results from payoff maximizing decisions in the auction that take into account the incentives of a resale opportunity. Specifically, I examine how the existence of an inter-bidder resale opportunity impacts bidder behavior in an English clock auction, and to what extent altering the bargaining power of the final buyer and reseller in the resale market determines the strategies followed in the initial auction, in an attempt to understand the existence of these inter-bidder transactions. Theoretical and behavioral analysis is used to develop hypotheses of speculation (bidding above value) and demand reduction (bidding below value) which are directly tested in a controlled experimental setting. While value bidding is a dominant strategy in a standard English clock auction without resale, when resale is allowed, this theoretical claim is weaker. Demand reduction is observed when the bargaining power is shifted to the final buyer in resale and when the bargaining power is shifted toward the reseller, speculation is observed. The revenue achieved in the initial auction depends on the behavior observed in the auction. Regardless of bargaining power, revenue is shown to decrease below what would have been earned in an English auction without resale due to demand reduction. When the reseller has the bargaining power, and speculation is observed, this loss in revenue is somewhat mitigated by increased speculation.

Reserve price strategy for seller agent in multiple simultaneous auctions

Internet auction is popular due to the flexibility and convenience that it offers to consumers. In online auctions, sellers are confronted with the dilemma of deciding the best reserve price for the items to be auctioned off. In an auction site such as eBay, one can always find the same item being sold by multiple sellers in different auctions. Determining this reserve price is not a straightforward decision process due to the complexity and vagueness of the online auction environment. Setting the reserve price too high may result in no sale whilst setting the reserve price too low may result in a sale with low profit. The main focus of this paper is to analyze the performance of the selling agents with varying pricing strategy when offering item for auctions. The strategy could be categorized as low, intermediate, high, and random based on its sellers' types. Our study showed that the use of these strategies produced significant drawbacks with negative impacts towards the overall selling upshots. To counteract these shortcomings, we develop an autonomous seller agent using a heuristic decision making framework. To derive the best reserve price, several constraints are considered including the number of competitors, the number of bidders, the auction length, and the profit that the seller desires. This paper presents the design, implementation and evaluation of our selling algorithm that a seller agent can use for auctioning homogeneous goods among multiple overlapping English auctions. In this work, we modeled our market simulation for a single unit auction using an independent private value framework with dynamic participation entry.