High-value Bidders Research Articles

Effect of Market Information on Bidder Attrition in Online Auction Markets

Information generated in online markets can affect both buyers’ and sellers’ expectations and therefore their choices. In this research, we investigate the effect of market information, generated in online auction markets, on buyers’ expectations and choices. To clear large inventories, sellers often conduct many auctions selling identical items over time, which creates an online auction market where competition dynamics spill over from one to auction to another. In these markets, bidders can participate in many auctions over a period of time, observe market information (supply, demand, and competition), and gain experience to increase their payoffs. We observe that despite having an opportunity to compete and win in future auctions, many bidders stop participating in these auction markets. We argue that observed market information affects their choices. We explore how bidders form expectations about market supply, demand, and competition based on information from two sources—market design parameters and behavior of market participants. By employing a hierarchical Bayesian latent attrition model, we empirically detect and investigate the effect of bidders’ expected market supply, demand, and competition on their attrition in these markets. Our study shows that the effect of market information on attrition is nuanced by bidders’ value heterogeneity. Through the lenses of behavioral economics theories, we show that the attrition behavior of high-value bidders is completely opposite that of low-value bidders. We discuss the practical implications of our findings.

Auctioning risk: the all-pay auction under mean-variance preferences

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the unique symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences.

Auctioning risk: The all-pay auction under mean-variance preferences

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Utilising our analytical bidding functions we discuss all-pay auctions with variance-averse bidders from a designer’s perspective. We extend our basic model to include noisy signals and allow for the possibility of variance-seeking preferences and type-dependent attitudes towards risk. (JEL C7, D7, D81. Keywords: Auctions, Contests, Mean-Variance preferences.)

Effect of Market Information on Bidders’ Attrition in Online Auction Markets

Information generated in online markets can affect both buyers’ and sellers’ expectations and therefore their choices. In this research, we investigate the effect of market information, generated in online auction markets, on buyers’ expectations and choices. To clear large inventories, sellers often conduct many auctions selling identical items over time, which creates an online auction market where competition dynamics spills over from one to auction to another. In these markets, bidders can participate in many auctions over a period of time, observe market information (supply, demand and competition), and gain experience to increase their payoffs. We observe that despite having an opportunity to compete and win in future auctions, many bidders stop participating in these auction markets. We argue that observed market information affects their choices. We explore how bidders form expectations about market supply, demand and competition based on information from two sources – market design parameters and behavior of market participants. By employing a hierarchical Bayesian latent attrition model, we empirically detect and investigate the effect of bidders’ expected market supply, demand and competition on their attrition in these markets. Our study shows that the effect of market information on attrition is nuanced by bidders’ value heterogeneity. Through the lenses of behavioral economics theories, we show that attrition behavior of high-value bidders is completely opposite to that of low-value bidders. We discuss practical implications of our findings.

A Theory of Indicative Bidding

When selling a business by auction, sellers typically use indicative bids—nonbinding preliminary bids—to select a small number of bidders to conduct due diligence and submit binding offers. We show that if entry into the auction is costly, indicative bids can be informative: symmetric equilibrium exists in weakly increasing strategies, with bidders “pooling” over a finite number of bids. The equilibrium helps the seller select high value bidders with higher likelihood, although the highest value bidders are not always selected. When the number of potential bidders is large, revenue and total surplus are both higher than when entry is unrestricted. (JEL D44, D83)

Efficiency in auctions with (failed) resale

The possibility of resale affects efficiency in multi-object uniform-price auctions with asymmetric bidders. We theoretically show that when the exogenous probability of a resale market is sufficiently low, final efficiency is lower than in an auction without resale. Our experimental design consists of four treatments that vary the probability that bidders participate in a resale market. Resale always increases efficiency compared to the auction allocation, but it also induces demand reduction by high-value bidders, which reduces auction efficiency. Consistent with theory and in contrast to what is usually argued, the possibility of resale may reduce final efficiency and changes in the probability of resale have a non-monotonic effect on efficiency. We also analyze bargaining chat data to provide insights into the functioning of resale markets.

All-Pay Auctions with a Buy-Price Option

This paper studies all-pay auctions for a product in which there is a buy-price option for bidders to guarantee purchases at a seller-specified price. We analyze symmetric pure-strategy equilibria in the first- and second-price all-pay auctions with the buy-price option. Under these equilibria, the buy-price option will affect bidders' bidding behavior: while it has no impact on low-value bidders, it makes middle-value bidders bid more aggressively and high-value bidders less aggressively. Under the optimal buy-price, the first- and second-price all-pay auctions maintain the same expected profit while the buy-price in the second-price is higher than those in the first-price all-pay auction. Compared to the uniform posted-price selling mechanism, all-pay auctions with the buy-price cannot attain more expected profit under the fixed number of consumers. However, if there is an endogenous entry process, they can attract more consumers and then reach more profit in expectation.

Demand Reduction in Multi‐Object Auctions with Resale: An Experimental Analysis

We analyse the effects of different resale mechanisms on bidders’ strategies in multi-object uniform-price auctions with asymmetric bidders. Our experiment consists of four treatments: one without resale and three resale treatments that vary the information available and the bargaining mechanism in the resale market. Resale markets induce demand reduction by high-value bidders and speculation by low-value bidders, thus affecting the allocation of the objects on sale. The magnitude of these effects, however, depends on the structure of the resale market. Features of the resale market that tend to increase its efficiency result in lower auction efficiency and seller's revenue.

Entry Deterrence in Dynamic Second-Price Auctions

We examine a dynamic second-price auction with independent private values and sequential costly entry. We show that delayed revelation equilibria exist in which some buyers place coordinated low early bids. These buyers revise their bids to reflect their true valuations just prior to the end of the auction. Compared to the benchmark immediate revelation equilibrium, in which buyers bid their valuations immediately after entry, fewer high-value bidders enter on expectation in the delayed revelation equilibria. Delayed revelation of buyer values decreases social welfare, but is necessary for bidders to have a strict participation incentive. (JEL D44, D82, D83)

Efficiency in Auctions with (Failed) Resale

We analyze how the possibility of resale affects efficiency in multi-object uniform-price auctions with asymmetric bidders using a combination of theory and experiments. The resale market is modeled as an unstructured bargaining game between auction bidders. Our experimental design consists of four treatments that vary the (exogenous) probability that bidders participate in a resale market after the auction. In all treatments, the possibility of resale increases efficiency after the auction, but it also induces demand reduction by high-value bidders during the auction, which reduces auction efficiency. In contrast to what is usually argued, resale does not necessarily increase final efficiency. When there is a low probability of a resale market, final efficiency is actually lower than in an auction without resale.

On the benefits of dynamic bidding when participation is costly

Consider a second-price auction with costly bidding in which bidders with i.i.d. private values have multiple opportunities to bid. If bids are observable, the resulting dynamic-bidding game generates greater expected total welfare than if bids were sealed, for any given reserve price. Making early bids observable allows high-value bidders to signal their strength and deter others from entering the auction. Nonetheless, as long as the seller can commit to a reserve price, expected revenue is higher when bids are observable than when they are sealed.

Multi-Object Auctions with Resale: An Experimental Analysis

We analyze the eects of dierent resale mechanisms in multi-object uniform-price auc- tions with asymmetric bidders. The possibility of resale aects bidders'strategies, and hence the allocation of the objects on sale. Our experimental design consists of four treatments: one without resale and three resale treatments that vary the information available and the bargaining mechanism in the resale market. As predicted by theory: (i) without resale, asymmetry among bidders reduces demand reduction; (ii) the presence of a resale market, regardless of its structure, increases demand reduction by high-value bidders and speculation by low-value bidders, thus reducing auction e¢ ciency. Low-value bidders always prefer resale to be allowed, but high-value bidders may not. In contrast to what is usually argued, resale does not necessarily increase …nal e¢ ciency and may not reduce the seller's revenue. Features of the resale market that tend to increase its e¢ ciency also reduce auction e¢ ciency and the seller's revenue.

Auctioning Risk: The All-Pay Auction under Mean-Variance Preferences

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Utilising our analytical bidding functions we discuss all-pay auctions with variance-averse bidders from a designer's perspective. We extend our basic model to include noisy signals and allow for the possibility of variance-seeking preferences and type-dependent attitudes towards risk.

Buy-It-Now or Take-a-Chance: Price Discrimination Through Randomized Auctions

Increasingly detailed consumer information makes sophisticated price discrimination possible. At fine levels of aggregation, demand may not obey standard regularity conditions. We propose a new randomized sales mechanism for such environments. Bidders can “buy-it-now” at a posted price, or “take-a-chance” in an auction where the top d > 1 bidders are equally likely to win. The randomized allocation incentivizes high-valuation bidders to buy-it-now. We analyze equilibrium behavior and apply our analysis to advertiser bidding data from Microsoft Advertising Exchange. In counterfactual simulations, our mechanism increases revenue by 4.4% and consumer surplus by 14.5% compared to an optimal second-price auction. This paper was accepted by Assaf Zeevi, stochastic models and simulation.

Are Speculators Unwelcome in Multi-Object Auctions?

I consider a uniform-price auction under complete information. The possibility of resale attracts speculators who have no use value for the objects on sale. A high-value bidder may strictly prefer to let a speculator win some of the objects and then buy in the resale market, in order to keep the auction price low. Although resale induces entry by speculators and therefore increases the number of competitors, high-value bidders' incentives to “reduce demand” are also affected. Allowing resale to attract speculators reduces the seller's revenue when bidders' valuations are dispersed. Speculators increase the seller's revenue only when they are outbid. (JEL D44, D83)

Resale and bundling in auctions

The possibility of resale increases bidders' incentives to jointly reduce demand in multi-object auctions, because resale increases low-value bidders' willingness to pay and reduces high-value bidders' willingness to pay. Therefore, resale may reduce the seller's revenue. In a simple model with complete information, however, allowing resale and bundling the objects on sale are “complement strategies” for the seller (under reasonable conditions)—by bundling and allowing resale the seller earns a higher revenue than by selling the objects separately and/or forbidding resale. We also show why allowing resale may reduce efficiency.

Impact of valuation ranking information on bidding in first-price auctions: A laboratory study

Landsberger et al. [Landsberger, M., Rubinstein, J., Wolfstetter, E., Zamir, S., 2001. First-price auctions when the ranking of valuations is common knowledge. Review of Economic Design 6, 461–480] identified optimal bidder behavior in first-price private-value auctions when the ranking of valuations is common knowledge, and they derived comparative-statics predictions regarding the auctioneer's expected revenue and the efficiency of the allocation. The experiment reported here tests the behavioral components of these comparative-statics predictions. The results support the prediction that buyers are inclined to bid more aggressively when they learn they have the low value. Contrary to the theory, buyers are inclined to bid less when they learn they have the high value. Consistent with theory, the overall proportion of efficient allocations is lower than in the first-price auction before information is revealed. But as a result of high-value bidders decreasing their bids, the expected revenue does not increase on a regular basis, contrary to the theory's predictions.

Impact of Valuation Ranking Information on Bidding in First-Price Auctions: A Laboratory Study

Landsberger et al. (2001) identified optimal bidder behavior in first-price private-value auctions when the ranking of valuations is common knowledge, and derived comparative-statics predictions regarding the auctioneer's expected revenue and the efficiency of the allocation. The experiment reported here tests the behavioral components of these comparative-statics predictions. The results support the prediction that buyers are inclined to bid more aggressively when they learn they have the low value. Contrary to the theory, buyers are inclined to bid less when they learn they have the high value. Once information is revealed, bidders tend to move toward better responses, exploiting new economic opportunities. Consistent with theory, the overall proportion of efficient allocations is lower than in the first-price auction before information is revealed. But as a result of high-value bidders decreasing their bids, the expected revenue does not increase on a regular basis, contrary to the theory's predictions.

Commitment in sequential auctioning: advance listings and threshold prices

This paper models sequential auctioning of two perfect substitutes by a strategic seller, who learns about demand from the first-auction price. The seller holds the second auction only when the remaining demand is strong enough to cover her opportunity cost. Bidding in anticipation of such a contingent future auction is characterized, including a sufficient condition for existence of an invertible (increasing symmetric pure-strategy) bidding equilibrium that facilitates the seller’s learning. A unique invertible bidding equilibrium exists for the Dutch auction format, but only when the second auction is sufficiently discounted by the bidders. In the equilibrium, high-valuation bidders shade their bids down as if the second auction were guaranteed. To counter such strategic bidding, the seller would value ex-ante commitment to hold the second auction less often. Three forms of such commitment are analyzed: commitment to list future auctions in advance, commitment to not hold the second auction unless the first price exceeds a publicly announced threshold, and commitment to a reserve-price in the second auction.

Commitment in Sequential Auctioning: Advance Listings and Threshold Prices

This paper models sequential auctioning of two perfect substitutes by a strategic seller, who learns about demand from the first-auction price. The seller holds the second auction only when the remaining demand is strong enough to cover her opportunity cost. Bidding in anticipation of such a contingent future auction is characterized, including a sufficient condition for existence of an invertible (increasing symmetric pure-strategy) bidding equilibrium that facilitates the seller's learning. A unique invertible bidding equilibrium exists for the Dutch auction format, but only when the second auction is sufficiently discounted by the bidders. In the equilibrium, high-valuation bidders shade their bids down as if the second auction were guaranteed. To counter such strategic bidding, the seller would value ex-ante commitment to hold the second auction less often. Three forms of such commitment are analyzed: commitment to list future auctions in advance, commitment to not hold the second auction unless the first price exceeds a publicly announced threshold, and commitment to a reserve-price in the second auction.