Rational Bidders Research Articles

Rational Bidding Meets Emotional Viewing: The Landscape of English Auction Livestreams in The Age of Algorithms

Rational Bidding Meets Emotional Viewing: The Landscape of English Auction Livestreams in The Age of Algorithms

A Privacy-preserving Auction Mechanism for Learning Model as an NFT in Blockchain-driven Metaverse

The Metaverse, envisioned as the next-generation Internet, will be constructed via twining a practical world in a virtual form, wherein Meterverse service providers (MSPs) are required to collect massive data from Meterverse users (MUs). In this regard, a critical demand exists for MSPs to motivate MUs to contribute computing resources and data while preserving user privacy. Federated learning (FL), as a privacy-preserving collaborative machine learning paradigm, can support distributed intensive computation in the Metaverse. In this work, we first investigate minting the machine learning models into NFT with FL assistance (referred to as FL-NFT), such that MUs as stakeholders can control the ownership and share the economic value of user-generated content (UGC). Specifically, MUs are encouraged to establish a decentralized autonomous organization (i.e., MU-DAO) to aggregate local models and mint FL-NFT. MUs and MSPs optimize the strategies by formulating an imperfect information Stackelberg game to trade off the cost and benefit. We apply the backward induction to derive the equilibrium solution. Then, we construct a privacy-preserving multi-winner sealed-bid auction mechanism (PMS-AM), in which the Hidden Markov Model assists MSPs in choosing rational bidding strategies according to historical bids, and the double auction mechanism determines the winners and price of FL-NFT. Finally, the numerical results based on theoretical analysis and simulations demonstrate that the proposed PMS-AM can increase the quality of FL-NFT and achieve the economic properties of incentive mechanisms such as individual rationality and incentive compatibility.

Boundedly rational bidding decision for land auctions during the transformation of real estate markets

Real estate developers in China exhibit different boundedly rational behaviors when bidding in different land auction formats, resulting in deviation from fully rational bidding, and the transformation of China’s real estate industry has intensified this deviation. To address this problem, this study establishes a reference utility model and a subjective decision probability model under the framework of incomplete information game to characterize developers’ utility distortion and winning probability distortion in open-bid auctions and sealed-bid auctions for land, respectively. The results show that the deviation between bounded rational bidding and fully rational bidding increases as developer competition intensifies. The equilibrium bidding of cost-disadvantaged developers in the boundedly rational model deviates less from the standard model. Moreover, in sealed-bid auctions, the "hiding degree" of cost-advantaged developers is greater, showing size effects, while the bids in open-bid auctions are more complex and affected by market conditions and developers’ risk preferences. Thus, this study characterizes boundedly rational bidding in land auctions and interprets the deviation from fully rational bidding, which can provide a more real basis for land auction mechanism design.

Revenue sharing bids of a loss-averse supplier for a new product development contract: a multi-method investigation

PurposeWhen developing a new product, a buying firm solicits revenue sharing bids from two competing suppliers. Bidding behaviors of suppliers do not always align with predictions from rational agent models due to task uncertainty and bounded rationality, which could result in non-optimal supplier offers and ultimately hurt buying firm interests. This paper aims to discuss the aforementioned issues.Design/methodology/approachThe authors built an analytical model that considers the impact of supplier technological risk, buyer–supplier coordination cost and supplier loss aversion on the optimal bid of the supplier. Next, using limited information processing capacity as a theoretic lens, the authors explore antecedents to the size of a focal supplier's bidding error, the absolute difference between the actual bid and the optimal bid. The authors used quantitative lab experimental data to test the hypotheses.Findings(1) Bounded rational bidders often fail to differentiate between relevant and irrelevant competitive information when placing bids, (2) loss aversion of a bidder significantly affects not only levels of bids, particularly for bidders with competitive disadvantages, but also sizes of the bidding error and (3) competitive information that has clearer performance implications are more influential in reducing sizes of bidding errors.Originality/valueThe results provide a comprehensive view of the bidding behaviors of a bounded rational supplier in an innovation outsourcing context with competition. With the results, managers now have a better understanding of behavioral influencers behind non-optimal supplier bids in an innovation outsourcing context.

What are the US Spectrum Auctions for 5G Teaching Us About Auction Efficiency?

This paper seeks to assess the efficiency of the first 5G spectrum auctions held in the United States. In 2018 and 2019, the Federal Communications Commission (FCC) administered auctions 101 and 102 to assign spectrum in the 28 GHz and 24 GHz bands, respectively. Auction 101 sold spectrum on the 28 GHz band for Upper Microwave Flexible Use Service licenses and raised a total of about $700 million. Auction 102 assigned spectrum on the 24 GHz band for Upper Microwave Flexible Use Services. It raised a total of close to $2 billion. In July 2020, the FCC auctioned the 3.5 GHz band for Priority Access Licensees, raising over $4 billion. I implement an assessment of the efficiency of an auction based on its observed bidding data during the clock rounds of the auctions, while relying on revealed preference theory. Data are available at the FCC’s Auctions website. Bidding data are organised by geographical area and for each geographical area, demand point sets for each round, for each bidder. I rely on the application of the well-known Generalised Axiom of Revealed Preference or GARP, and less well-known Homothetic Axiom of Revealed Preference or HARP, to construct two indexes, Afriat Efficiency Index (AEI) and Homothetic Efficiency Index (HEI) to calculate measurements of rational bidding associated with each bidder. The US relied on an auction format, which uses demand revelation but allows the bidders to state the price at which they would demand a number of units of the same item (that is, blocks or licenses). In essence, the auction format for auctions 102 and 105 followed a multiple round format with an ascending clock not entirely driven by the auctioneer, whereby a bid is best described as a stepwise (ascending or descending) demand function revealed on the price range set by the auctioneer for the round. The difficulty in dealing with the data is that the bidding language of these auctions allows a bidder to express its demand for the items being sold in a service area by means of a stepwise function (either ascending or descending). The challenge at this stage is to suitably adapt the data to the usual data set format assumed by GARP or HARP. Using an efficiency approach, I assess each auction at two levels: assessment of efficiency through utility maximisation via AEI and an assessment of efficiency through homotheticity via HEI. Auctioneers, in particular, and spectrum authorities, in general, are concerned with the economic aspects of their spectrum assignment processes. The most important issue that pertains the results of the auction is the answer to the question, was the spectrum assigned to those bidders who can make the best use of it? Answering the question puts us on the grounds of auction efficiency. Devising methods to use the auction bidding data to answer such question has been a long-standing question. GARP and HARP are two revealed preference approaches that do not require us to adopt a parametrized utility function to represent bidder’s preferences. Those methods use the observed data and define a rigorous consistency test on the data.

The Effects of Loss Aversion and Sunk Cost Sensitivity in All-Pay Auctions for Charity

All-pay auctions have demonstrated an extraordinary ability at raising money for charity. One mechanism in particular is the war of attrition, which frequently generates revenue well beyond what is theoretically predicted with rational bidders. However, what motivates the behavioral response in bidders remains unclear. By imposing charity auction incentives in the laboratory, this paper uses controlled experiments to consider the effects of loss aversion and sunk cost sensitivity on bidders’ willingness to contribute. The results indicate that revenues in incremental bidding mechanisms, such as the war of attrition, rely heavily on bidders who are sunk cost sensitive. It is shown this behavioral response can be easily curbed with a commitment device which drastically lowers contributions below theoretical predictions. A separate behavioral response due to loss aversion is found in the sealed-bid first-price all-pay auction, which reduces bidders’ willingness to contribute. These findings help explain the inconsistencies in revenues from previous all-pay auction studies and indicate a mechanism preference based on the distribution of these behavioral characteristics.

A Q-Cube Framework of Reinforcement Learning Algorithm for Continuous Double Auction among Microgrids

Decision-making of microgrids in the condition of a dynamic uncertain bidding environment has always been a significant subject of interest in the context of energy markets. The emerging application of reinforcement learning algorithms in energy markets provides solutions to this problem. In this paper, we investigate the potential of applying a Q-learning algorithm into a continuous double auction mechanism. By choosing a global supply and demand relationship as states and considering both bidding price and quantity as actions, a new Q-learning architecture is proposed to better reflect personalized bidding preferences and response to real-time market conditions. The application of battery energy storage system performs an alternative form of demand response by exerting potential capacity. A Q-cube framework is designed to describe the Q-value distribution iteration. Results from a case study on 14 microgrids in Guizhou Province, China indicate that the proposed Q-cube framework is capable of making rational bidding decisions and raising the microgrids’ profits.

Heterogeneous bids in auctions with rational and boundedly rational bidders: theory and experiment

We present results from a series of experiments that allow us to measure overbidding and, in particular, underbidding in first-price auctions. We investigate the extent to which the amount of underbidding depends on the seemingly innocuous parameters of the experimental setup. To structure our data, we present and test a theory that introduces constant markdown bidders into a population of fully rational bidders. While a fraction of bidders in the experiment can be described by Bayesian Nash equilibrium bids, a larger fraction seems either to use constant markdown bids or to rationally optimise against a population with fully rational and boundedly rational markdown bidders.

Bidding Decisions with Nonequilibrium Strategic Thinking in Reverse Auctions

This paper considers decisions of bidders with bounded rationality in different thinking levels for a first-price sealed-bid reverse auction. To characterize the nonequilibrium strategic thinking, we construct a mathematical model that incorporates the “level-k decision rule” to iteratively derive closed-form solutions. Then the effects of bidders’ heterogeneous beliefs of thinking levels on their bid prices and expected payoffs are investigated. We find that under some assumptions, bidders will exhibit oscillating behavior in their bid prices and expected profits in terms of thinking levels. When the thinking level tends to infinity, the bid prices and expected profits converge to those in the conventional analysis with perfectly rational bidders. An interesting finding from theoretical analysis verified by numerical experiments is that any bidder with a thinking level above two should bid according to level-2 bidder’s strategy to achieve the highest expected profit, and in this case the buyer will pay no more than level-2 bidder’s bid price.

Towards a rational bidding process of initial public offerings: a proposed model for secure auction based on homomorphic computation and secure hash functions

There has been a large pool of research on the factors of initial public offerings (IPO) underpricing and investors' herd behaviour that influence investment decisions in general but no attention has been paid on the security aspects of IPO bidding and allocation processes to avoid unfair and fraudulent trading activities. This paper proposes a cryptographic model for secure auction of initial public offerings in Indian context. The paper synthesises IPOs by identifying the vulnerable points in it and proposes a homomorphic computation-based cryptographic model to secure it. The model uses a cryptographic hash function-based data hiding protocol for its auction process. The total infrastructure setup has also been discussed and the security measures are analysed.

Towards a rational bidding process of initial public offerings: a proposed model for secure auction based on homomorphic computation and secure hash functions

Towards a rational bidding process of initial public offerings: a proposed model for secure auction based on homomorphic computation and secure hash functions

The German 4G Spectrum Auction: Design and Behaviour

The 2010 German 4G spectrum auction was an unusually large simultaneous ascending multi-band auction. The bidding was competitive and the final assignment was efficient. However, our analysis suggests that independent and rational bidders had an opportunity to coordinate implicitly on a low-revenue outcome. Coordination was difficult, though, because of a multiplicity of focal points. One important focal point involved post-auction negotiations, posing risks to bidders and the auctioneer. We analyse different bidding scenarios and how post-auction negotiations can affect values, bidding and efficiency. We also discuss how the simultaneous ascending auction format can be augmented to mitigate the risks.

Optimistic irrationality and overbidding in private value auctions

Bidding one’s value in a second-price, private-value auction is a weakly dominant solution (Vickrey in J Finance 16(1):8–37, 1961), but repeated experimental studies find more overbidding than underbidding. We propose a model of optimistically irrational bidders who understand that there are possible gains and losses associated with higher bids but who may overestimate the additional probability of winning and/or underestimate the potential losses when bidding above value. These bidders may fail to discover the dominant strategy—despite the fact that the dominant strategy only requires rationality from bidders—but respond in a common sense way to out-of-equilibrium outcomes. By varying the monetary consequences of losing money in experimental auctions we observe more overbidding when the cost to losing money is low, and less overbidding when the cost is high. Our findings lend themselves to models in which less than fully rational bidders respond systematically to out-of-equilibrium incentives, and we find that our model better fits the effects of our manipulations than most of the existing models we consider.

Rational bidding in a procurement auction with subjective evaluations

In practice, procurement auctions often involve subjective evaluations of bids, especially when consisting of quality or design parameters which are hard to quantify. We formally define a notion of subjectivity in an auction environment and analyze the implications for rational bidding behavior. Our findings explain some observed bidding behaviors that are inconsistent with standard equilibrium predictions. Finally we examine the way subjectivity facilitates the practice of favoritism on part of the auctioneer.

Come on in, the Water's Fine! An Experimental Examination of Hybrid IPO Auctions with a Public Pool

We offer experimental and theoretical evidence that the auction method for initial public offerings (IPOs) may be improved through the use of hybrid auctions with separate retail tranches or ‘public pools’. Such hybrids, which combine a price-setting tranche (an auction or book building) with a separate tranche that allows investors to place orders without specifying a price (the public pool), have been used for IPOs around the world. We develop theory, then run laboratory experiments to examine the effects of a public pool on multi-unit uniform price auction IPOs. Our experimental auction design incorporates key features of the IPO process such as endogenous bidder entry, costly information acquisition, differing capacity constraints and uncertainty with respect to the intrinsic value. Simulations are used to characterize the Symmetric Bayesian Nash Equilibria (SBNE) for both pure and hybrid auctions in a model that is calibrated to key parameters from our experimental data, generating predictions for the remaining variables. As predicted, a public pool tranche improves auction performance by increasing proceeds, lowering price volatility, reducing price error and reducing the incentive for small bidders to free ride by submitting extremely high bids. Underpricing occurs in both treatments but is less severe with the public pool. We also show that in collusive-seeming multi-unit auction equilibria, it may be optimal for informed, rational bidders to place clinching bids strictly above the expected value per unit, leading to very steep demand curves. Overall, our results imply that both IPO auctions and crowdfunding may be improved by restricting retail investors to a separate, non-price-setting tranche.

Unlicensed Operations in the 600 MHz Guard Bands: Potential Impact of Interference on the Outcome of the Incentive Auction

In its June 2014 Report and Order on the 600 MHz incentive auction, which will repurpose TV broadcast spectrum for mobile broadband service, the FCC authorized the use of unlicensed devices in the post-auction guard bands. Although the FCC maintains that it will not be a problem, key stakeholders have argued that the operation of unlicensed devices in the 600 MHz guard bands could cause harmful interference to licensed mobile LTE services in nearby bands. In this paper, we analyze the potential for such interference and its implications for the incentive auction. We begin by critiquing the FCC’s technical analysis, which found that an unlicensed device using the 600 MHz guard bands would interfere with the operation of a licensed mobile device using LTE at 600 MHz if the two devices were less than 20 feet apart. Although that finding will give potential bidders serious pause, it understates the real problem. When we modify key FCC assumptions to reflect conditions at hand, the estimated interference range is 45 feet to 75 feet.Next, we analyze how harmful interference will reduce LTE network capacity and the corresponding market value of 600 MHz spectrum. Based on our analysis of an LTE network in a band similar to 600 MHz, we find that a 5 percent loss of capacity will lower the value of the affected spectrum by at least 9 percent; a 20 percent loss of capacity will lower its value by at least 43 percent; and a 35 percent loss of capacity will eliminate most (93 percent) of its value. Finally, we trace how the prospect of interference, through its adverse impact on the value of spectrum, could damage the incentive auction. Two features of the auction magnify the impact of the risk of interference. First, at the allocation stage, bidders will be unable to distinguish between those blocks that are subject to interference from unlicensed operations and those that are not. Thus, rational bidders will assume that all blocks are subject to interference. We estimate that the allocation-stage revenues will decrease by an amount ranging from 9 percent (for a 5 percent level of interference) to 93 percent (for a 35 percent level of interference). Using for purposes of illustration the FCC’s 84-megahertz band plan (84 megahertz of broadcast spectrum cleared and 70 megahertz repurposed for mobile broadband), with a 5 percent level of interference, total allocation-stage revenues will be reduced by $4 billion, to about $40.3 billion. At the 35 percent level, allocation-stage revenues for this plan will be reduced by about $41.2 billion, to $3.0 billion.Second, even though some of the revenue lost at the allocation stage will be recovered in the assignment round (when bidders will be able to identify individual blocks), the amount of TV spectrum cleared depends solely on the revenue generated in the allocation stage, which must cover total clearing costs. Thus, the prospect of interference, by reducing allocation-stage revenues, will limit how much spectrum even makes it to the assignment round. For example, at the 10 percent level of interference, allocation-stage revenues will fall short of required clearing costs for the FCC’s five largest band plans. Under that scenario, the largest feasible plan would be the illustrative band plan, which would clear 84 megahertz and repurpose 70 megahertz for mobile broadband. This is 50 megahertz less than would be repurposed under the FCC’s largest band plan (144 megahertz cleared, 120 megahertz repurposed), and some of it would be subject to interference. We estimate that every 10 megahertz of broadcast spectrum that is not repurposed for mobile broadband represents at least a $60 billion loss in consumer welfare. Thus, with only a 10 percent level of interference, the best possible outcome (70 megahertz repurposed) would represent at least a $300 billion loss in consumer welfare relative to the FCC’s largest band plan (120 megahertz repurposed).

Risk Aversion and the Winner's Curse

This article analyzes an auction in which bidders see independent components of a common prize value. The Nash equilibrium for two rational bidders is shown to be independent of risk attitudes. The information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize, contingent on winning, and thus they suffer the winner's curse. Subjects in a laboratory experiment clearly fall prey to the winner's curse; the data conform most closely to the predictions of the naive model. Moreover, the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate (private value) bidding exercise.

Economics and design of balancing power markets in Germany

This article analyzes the economic fundamentals that govern market design and behavior in German balancing power markets. Then, partly based on theoretical work by Chao and Wilson [3], we illustrate the role of the scoring and the settlement rule as key elements of the market design. With sufficiently competitive markets, a settlement rule based on uniform pricing ensures efficient energy call in the balancing power market. A scoring rule based on capacity prices only ensures an efficient production schedule. Thus, both rules together with rational bidding ensure simultaneous efficiency on the balancing power market and the wholesale electricity market.

Corporate Takeovers and Economic Efficiency

I review recent takeover research that advances our understanding of “who buys who” in the drive for productive efficiency. This research provides detailed information on text-based definitions of product market links between bidders and targets, the role of the supply chain and industrial networks in driving takeovers, target plant efficiency, and pre- and post-takeover investment in product innovation. Moreover, recent evidence adds to our understanding of “how firms are sold” (transaction efficiency). Almost half of takeovers involving public targets are initiated by the seller and not by the buyer. Targets are strongly averse to bidder toeholds, and the merger negotiation process strongly protects proprietary information. Takeover premiums leave traces of rational bidding strategies, including bid preemption and winner’s curse avoidance. Recent tests employing exogenous instrumentation of bidder valuations reject that bidder shares are systematically overpriced in all-stock bids and suggest that bidder synergy gains are much larger than previously thought.

A Study of Bidding Behavior in All-Pay Auctions

The all-pay auction, where every bidder pays his highest bid, is an increasingly popular auction format with the potential to generate higher revenues. In a field study, we investigate bidding strategies and revenue implications in simultaneous paired auctions that involve identical products in two different auction formats -- winner-pay and all-pay formats in charity and non-charity settings. Our auctions run in an online environment with the realistic feature that sellers cannot fully enforce payment compliance from non-winning bidders. We find that the all-pay format generated substantially higher revenue than the winner-pay format. This is despite the fact that winning prices were lower in the all-pay format and only about half of the pledges by losing bidders are eventually paid. We find important differences in the bidding behavior between paying and non-paying losing bidders. In particular, non-paying bidders tend to bid more aggressively, placing more bids, placing them later and bidding higher amounts. To characterize bidding strategy, we study bid timing, auction choice and jump bidding. We find evidence that bidders in all-pay auctions use rational bidding strategies that are effective in these settings such as early jump bidding and late incremental bidding. In the all-pay auctions, early jump bidding can deter entry by others and late incremental bidding can reduce commitment. In the winner-pay auctions, such strategies are not effective and we observe them to a lesser extent.