Price Sealed Bid Auction Research Articles

The nature of information and its effect on bidding behavior: Laboratory evidence in a first price common value auction

We study in the laboratory a series of first price sealed bid auctions of a common value good. Bidders face three types of information: private information, public information and common uncertainty. Auctions are characterized by the relative size of these three information elements. Only half of our subjects bid differently depending on whether the last piece of information obtained is private or public but they do not react to each type of information as predicted by theory. The other half of the subjects do not distinguish between private and public information and either consistently underbid or consistently overbid.

Truthful and efficient mechanisms for Website dependent advertising auctions

Recently we have witnessed the phenomena of private Website owners who are willing to dedicate space on their Website for advertisements managed by leading search engines (e.g., Google, Bing and Yahoo). In most cases the choice of the advertisements displayed on a certain Website is made without taking into account the preferences of the Website hosting the advertisements. This causes the Website that dedicate space for the ads to be exposed to ads that are irrelevant to the content on the Website. In this paper, we focus on the design of auction protocols that take into account the Website owner's preferences by associating him with a utility function reflecting the value for each ad shown in his space. In doing so we introduce the dispensation scheme into the second price sealed bid auction for both the single and the multi-slot cases. For the single-slot, we propose a mechanism that proved to be individual rational, truthful, and a free advertisement condition is defined. For the multi-slot case, we propose three truthful mechanisms. Simulation results show that the allocation efficiency of two of the proposed mechanisms maintain a near to optimal allocation efficiency compared to optimal allocation calculated using the Hungarian mechanism, while substantially reducing computational complexity from cubic to linear.

Bounds in auctions with unobserved heterogeneity

Many empirical studies of auctions rely on the assumption that the researcher observes all variables that make auctions differ ex ante. When there is unobserved heterogeneity, the direction of the bias this causes is known only in a few restric- tive examples. In this paper, I show that ignoring unobserved heterogeneity in a first price sealed bid auction with symmetric independent private values gives bounds on several quantities of economic interest under surprisingly general con- ditions. The results apply to certain quantities related to expectations of valua- tions, including bidder profits (which can be used to recover bid preparation costs in entry models) and the efficiency loss of assigning the object randomly. I then turn to estimation of these bounds, and show that, when only the winning bid is available, the rate of convergence can be slower than the square root of the num- ber of auctions observed and depends on the number of bidders. These results ap- ply more generally to estimation of functionals of a distribution from repeated ob- servations of an order statistic and may be of independent interest. I apply these methods to bound the efficiency loss from replacing a set of procurement auc- tions for highway construction in Michigan with random assignment. Keywords. Auctions, unobserved heterogeneity, L-statistics, nonstandard asymp- totics. JEL classification. C14, C44.

Simultaneous Allocation of Bundled Goods Through Auctions: Assessing the Case for Joint Bidding

We use the experimental method to study the costs and benefits of allowing joint bidding in simultaneous multi-unit first price sealed bid auctions for bundled goods. The research has immediate applications to the sale of public forest stands that arbor a mixture of species. Joint bidding and communication raise the prospect of higher allocative efficiency, but also of collusive bidding through a reduction in the number of bidders and a greater scope for the formation of bidding rings. However, we find that allowing joint bidding has a significant positive impact on efficiency and reduces collusion significantly. We also explore the robustness of the results to characteristics of the auction environment that are relevant to timber auctions.

Evolutionary Stability in First Price Auctions

This paper studies the evolutionary stability of the unique Nash equilibrium of a first price sealed bid auction. It is shown that the Nash equilibrium is not asymptotically stable under payoff monotonic dynamics for arbitrary initial populations. In contrast, for some classes of bid functions, when the initial population includes a continuum of strategies around the equilibrium, the replicator dynamic does converge to the Nash equilibrium. Simulations are presented for the replicator and Brown–von Neumann–Nash (BNN) dynamics. They suggest that the convergence for the replicator dynamic is slow compared to that for the BNN dynamic.

The high/low divide: Self-selection by values in auction choice

Most prior theoretical and experimental work involving auction choice has assumed bidders find out their value after making a choice of which auction to enter. We examine whether or not bidders knowing their value prior to making a choice of which among multiple alternative auction formats to enter impacts their choice decision and/or the outcome of the auctions. The results show a strong impact on auction choice. Subjects with low values choose the first price sealed bid auction more often while subjects with high values choose the ascending auction more often. The number of bidders in each auction, revenue, efficiency and average bidder surplus all end up equalized.

Prediction markets: an experimental approach to forecasting cattle on feed

PurposeThe purpose of this paper is to use prediction markets to forecast an agricultural event: United States Department of Agriculture's number of cattle on feed (COF). Prediction markets are increasingly popular forecast tools due to their flexibility and proven accuracy to forecast a diverse array of events.Design/methodology/approachDuring spring 2008, a market was constructed comprised of student traders in which they bought and sold contracts whose value was contingent on the number of COF to be reported on April 18, 2008. During a nine‐week period, students were presented three types of contracts to forecast the number of COF. To estimate forecasts a uniform price sealed bid auction mechanism was used.FindingsThe results showed that prediction markets forecasted 11.5 million head on feed, which was about 1.6 percent lower than the actual number of COF (11.684 million). The prediction market also fared slightly worse than analysts' predictions, which on average suggested there would be about 11.795 million head (an over‐estimate of about 1 percent).Originality/valueThe contribution of this study was not to provide conclusive evidence on the efficacy of using prediction markets to forecast COF, but rather to present an empirical example that will spark interest among agricultural economists on the promises and pitfalls of a research method that has been relatively underutilized in the agricultural economics literature.

Procuring Commodities: First Price Sealed Bid or English Auction?

I use laboratory experiments to examine the relative performance of the English auction (EA) and the first price sealed bid auction (FPA) when procuring a commodity. The mean and variance of prices are lower in the FPA than in the EA. Bids and prices in EA agree with game theoretic predictions while they don’t in the FPA. To resolve these deviations found in the FPA, I consider a mixture model with three bidding rules: constant absolute mark-up, constant percentage mark-up, and strategic best response. A dynamic specification is estimated as a hidden Markov model. Initially about three quarters of the subjects are strategic bidders, but over time the number of strategic bidders falls to below sixty-five percent. There is a corresponding growth in those who bid a constant absolute mark-up above realized cost. This model provides an explanation of the dynamics of the mean and variance of price.

The Sealed-Bid Abstraction in Online Auctions

This paper presents five empirical tests of the popular modeling abstraction that assumes bids from online auctions with proxy bidding can be analyzed “as if” they were bids from a second price sealed-bid auction. The tests rely on observations of the magnitudes and timings of the top two proxy bids, with the different tests stemming from different regularity assumptions about the underlying distribution of valuation signals. We apply the tests to data from three eBay markets - MP3 players, DVDs, and used cars - and we reject the sealed-bid abstraction in all three datasets. A closer examination of these rejections suggests they are driven by less experienced bidders. This consistent rejection casts doubt on several existing theories of online auction behavior and suggests some demand estimates based on the abstraction can be biased. To assess the direction and magnitude of this bias, we propose and estimate a new model in which some bidders conform to the abstraction while other bidders bid in a reactive fashion. Since reactive bidding can be at least partially detected from the data, we are able to estimate the underlying distribution of demand and compare it to what the sealed-bid abstraction implies. We find that our proposed model fits the data better, and our demand estimates reveal a large potential downward bias were we to assume the second-price sealed-bid model instead.

COMMUNITY PROPERTY AUCTION, NASH BIDDING RULE AND CHINA'S RURAL ECONOMIC REFORM

In this paper we present a model based on the auction theory for community properties and its possible application to China's economic reforms. We derive the Nash bidding rule for the first price sealed-bid auction of a community-owned object, and compare it with the bidding rule for auctions of a privately-owned object. Moreover, we argue that in the process of China's economic reforms, auctioning off the community-owned properties to private owners is the optimal way to achieve economic efficiency together with social equity. This paper has obvious implications for China's reforms relating to commercializing its rural land and other community property.

From the Editors…

This issue's “From the Editors…” column is coauthored with Managing Editor Kelly Kophazi. In addition to introducing our articles, we report here on the past year from the perspective of the editorial office. The authors of the first three articles conducted laboratory experiments to examine decision behavior in financial investment decisions, bidding in auctions, and inventory ordering decisions. First, Dennis Vrecko, Alexander Klos, and Thomas Langer report on the “Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences.” Our second article is “A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions,” by Richard Engelbrecht-Wiggans and Elena Katok. The third article, by Srinagesh Gavirneni and Yusen Xia, is on “Anchor Selection and Group Dynamics in Newsvendor Decisions—A Note.” Our final article, describing the application of decision analysis for an Italian waste processing decision, is “Resource-Limited Multiattribute Value Analysis of Alternatives for Immobilizing Radioactive Liquid Process Waste Stored in Saluggia, Italy,” by Alan J. Brothers, Shas V. Mattigod, Denis M. Strachan, Gordon H. Beeman, Paul K. Kearns, Angelo Papa, and Carlo Monti.

A Direct Test of Risk Aversion and Regret in First Price Sealed-Bid Auctions

Why do bidders tend to bid higher than the risk-neutral Nash equilibrium in sealed-bid first price auction experiments? The effect of risk aversion has long been offered as a possible explanation. More recently, several studies proposed regret as another explanation, citing strong experimental evidence. But which effect is more important? We design an experiment to separate the effects of risk aversion from those of regret. We find overwhelming evidence in support of the regret model, and virtually no support for the constant relative risk aversion model.

Collusion in Auctions for Emission Permits: An Experimental Analysis

Environmental markets have several institutional features that provide a new context for the use of auctions and which have not been studied previously. This paper reports on laboratory experiments testing three auction forms: uniform and discriminatory price sealed bid auctions and an ascending clock auction. We test the ability of subjects to tacitly or explicitly collude in order to maximize profits. Our main result is that the discriminatory and uniform price auctions produce greater revenues than the clock auction, both without and with explicit communication. The clock appears to be more subject to successful collusion because of its sequential structure and because it allows bidders to focus on one dimension of cooperation (quantity) rather than two (price and quantity).

Revenue equivalence revisited

The conventional wisdom in the auction design literature is that first price sealed bid auctions tend to make more money while ascending auctions tend to be more efficient. We re-examine these issues in an environment in which bidders are allowed to endogenously choose in which auction format to participate. Our findings are that more bidders choose to enter the ascending auction than the first price sealed bid auction and this extra entry is enough to make up the revenue difference between the formats. Consequently, we find that both formats raise approximately the same amount of revenue. They also generate efficiency levels and bidder earnings that are roughly equivalent across mechanisms though the earnings in the ascending might be slightly higher.

A comparison of first price multi-object auctions

We compare simultaneous multi-object English-type ascending price auctions with first price sealed bid auctions in private values environments with multi-object demands. Special attention is paid to the effect of closing rules on ascending auctions’ outcomes. We find that simultaneous ascending auctions with the soft closing rule are the most efficient, while the sealed bid auctions generate the highest revenue. Ascending auctions with the hard closing rule display a significant amount of late bidding, resulting in the lowest among the three institutions revenue and efficiency.

Bidding ‘as if’ risk neutral in experimental first price auctions without information feedback

Experimental research on first price sealed bid auctions has usually involved repeated settings with information feedback on winning bids and payoffs after each auction round. Relative to the risk neutral Nash equilibrium, significantly higher bidding has been reported. The present paper reports the results of experimental first price auctions with n=7 where feedback on payoffs and winning bids is withheld. Under these conditions, average bidding is below the risk neutral Nash equilibrium prediction but converges to it with repetition.

Sealed Bid Auctions with Ambiguity: Theory and Experiments

This study presents a laboratory experiment of the first and second price sealed bid auctions with independent private values, where the distribution of bidder valuations may be unknown. In our experimental setting, in the first price auction, bids are lower in the presence of ambiguity. This result is consistent with ambiguity loving in a model that allows for different ambiguity attitudes. We also find that the first price auction generates significantly higher revenue than the second price auction with and without ambiguity.

Sealed bid auctions with ambiguity: Theory and experiments

This study presents a laboratory experiment of the first and second price sealed bid auctions with independent private values, where the distribution of bidder valuations may be unknown. In our experimental setting, in first price auctions, bids are lower with the presence of ambiguity. This result is consistent with ambiguity loving in a model that allows for different ambiguity attitudes. We also find that the first price auction generates significantly higher revenue than the second price auction with and without ambiguity.

Auctions with Opportunistic Experts

In this paper we revisit the first price and the second price sealed-bid auctions, but, unlike the standard model, we assume that bidding is conducted by an expert on behalf of the client, and that the client does not completely trust the expert's qualifications. In particular, if the client does not win the auction, but could have won it by submitting a bid below her valuation or won but feels she could have paid less for the object, the client asks the expert to justify the strategy. The objective of this paper is to incorporate the concern for the justifiability into the expert's objective function. We show that under some assumptions about the justification process the requirement of justifiability increases the optimal bid in the first price sealed-bid auction, while bidding the client's true value remains the optimal strategy in the second price auction sealed-bid auction. Hence, the first price auction may raise more revenue than the second price auction and thus it will be preferred by the seller. Both auctions allocate the good to the client with the highest valuation. However, the second price sealed-bid auction is more efficient, since the experts do not incur costs from the failure to justify their strategies.

Total-Cost Procurement Auctions: Should the Buyer Reveal Suppliers' Quality?

We consider sealed and open-bid total-cost procurement auctions where two attributes are used for contract award decisions: price, which is bid by the supplier; and a fixed quality adjustment cost, which is included by the buyer to capture non-price factors such as a supplier's quality and reliability. Suppliers know only their own true production cost and their own quality adjustment cost, and the buyer does not know the suppliers' true production costs but does know all suppliers' quality adjustment costs, which she herself sets in order to make an informed total-cost decision. The buyer, who seeks to minimize her total (price and quality adjustment) procurement cost, can choose to announce the quality adjustment costs of all suppliers by running a descending open-bid auction, or conceal them by running a first price sealed-bid auction. We characterize the buyer's choice between the two formats as a threshold decision over suppliers' quality adjustment costs, and analyze the effect of supplier beliefs on her decision. We also study the impact of additional suppliers on the buyer's decision, the effect of correlation between suppliers' production costs and their quality adjustment costs, and additive as well as multiplicative total cost functions. The results suggest that procurement managers can use their evaluations of suppliers' qualities to make better auction format decisions.