Common Value Auctions and the Winner's Curse

by Kagel, John H.; Levin, Dan

• ISBN13: 9781400830138
• ISBN10: 1400830133
• Copyright: 2009-03-01
• Publisher: Princeton Univ Pr

Summary

Few forms of market exchange intrigue economists as do auctions, whose theoretical and practical implications are enormous. John Kagel and Dan Levin, complementing their own distinguished research with papers written with other specialists, provide a new focus on common value auctions and the "winner's curse." In such auctions the value of each item is about the same to all bidders, but different bidders have different information about the underlying value. Virtually all auctions have a common value element; among the burgeoning modern-day examples are those organized by Internet companies such as eBay. Winners end up cursing when they realize that they won because their estimates were overly optimistic, which led them to bid too much and lose money as a result. The authors first unveil a fresh survey of experimental data on the winner's curse. Melding theory with the econometric analysis of field data, they assess the design of government auctions, such as the spectrum rights (air wave) auctions that continue to be conducted around the world. The remaining chapters gauge the impact on sellers' revenue of the type of auction used and of inside information, show how bidders learn to avoid the winner's curse, and present comparisons of sophisticated bidders with college sophomores, the usual guinea pigs used in laboratory experiments. Appendixes refine theoretical arguments and, in some cases, present entirely new data. This book is an invaluable, impeccably up-to-date resource on how auctions work--and how to make them work.

Table of Contents

Preface	p. xiii
Credits	p. xv
Bidding in Common Value Auctions: A Survey of Experimental Research	p. 1
An Initial Experiment Demonstrating the Winner's Curse	p. 4
Sealed-Bid Auctions	p. 5
Theoretical Considerations: First-Price Sealed-Bid Auctions	p. 6
Some Initial Experimental Results: Inexperienced Bidders	p. 7
Auctions with Moderately Experienced Bidders and the Effects of Public Information on Sellers' Revenue	p. 7
Is the Winner's Curse a Laboratory Artifact? Limited Liability for Losses	p. 13
Second-Price Sealed-Bid Auctions	p. 16
Group versus Individual Bids	p. 20
Summing Up	p. 22
English Auctions and First-Price Auctions with Insider Information	p. 23
English Auctions	p. 24
Auctions with Insider Information	p. 27
The Winner's Curse in Other Settings	p. 33
The Winner's Curse in Bilateral Bargaining Games	p. 33
The Winner's Curse in "Blind-Bid" Auctions	p. 36
Lemons and Ripoffs: The Winner's Curse in Markets with Quality Endogenously Determined	p. 39
The Swing Voter's Curse	p. 40
Summing Up	p. 46
How Do Bidders Learn to Overcome the Winner's Curse?	p. 47
Bilateral Bargaining Games	p. 47
Inexperienced Bidders in Sealed-Bid Auctions	p. 48
Super-Experienced Bidders in Sealed-Bid Auctions	p. 51
The Role of Information Feedback on Learning	p. 52
Comparing Results from Field Studies with Experiments	p. 53
Direct Comparisons between Laboratory and Field Data	p. 56
Differences in Structure between Laboratory and Field Auctions	p. 58
Summing Up	p. 60
Concluding Remarks	p. 60
Summary of Empirical Findings from the Laboratory	p. 60
Theory Motivated by Experiments	p. 62
Auction Theory and Experiments at Work: Airwave Rights Auctions	p. 65
Overview of What Follows	p. 66
First-Price Common Value Auctions: Bidder Behavior and the "Winner's Curse"	p. 85
Introduction	p. 85
Structure of the Auctions	p. 86
Theoretical Considerations and the Winner's Curse	p. 87
Experimental Results	p. 89
Market Outcomes	p. 89
Individual Bidding Behavior over Time	p. 93
Summary and Conclusions	p. 100
Appendix: Inexperienced Bidders in Second-Price Common Value Auctions	p. 101
Notes	p. 104
References	p. 105
The Winner's Curse and Public Information in Common Value Auctions	p. 107
Structure of the Auctions	p. 108
Basic Auction Structure	p. 108
Auctions with Public Information	p. 112
Varying Numbers of Bidders	p. 113
The Experience Factor	p. 113
Theoretical Considerations	p. 114
Private Information Conditions	p. 114
Effects of Public Information	p. 116
Summary of Research Questions of Primary Interest	p. 118
Experimental Results	p. 119
Bidding Patterns with Private Information	p. 119
Effects of Public Information on Seller's Revenues	p. 127
Summary of Experimental Outcomes of Primary Interest	p. 131
Toward Generalizability: But Is This How the Real World Operates?	p. 131
Conclusions	p. 134
Notes	p. 136
References	p. 140
Addendum: Benchmark Equilibrium for First-Price Auctions with Public Information	p. 141
Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions	p. 149
Introduction	p. 149
Structure of the Auctions	p. 152
Basic Auction Structure	p. 152
Auctions with Public Information	p. 152
Subject Experience and Varying Numbers of Bidders	p. 153
Theoretical Considerations	p. 154
Naive Bidding under Private Information Conditions: A Model of the Winner's Curse	p. 154
Nash Equilibrium Bidding under Private Information Conditions	p. 155
Naive Bidding under Public Information Conditions	p. 156
Nash Equilibrium Bidding under Public Information Conditions	p. 157
Experimental Results	p. 160
Bidding Patterns with Private Information	p. 160
Effects of Public Information on Revenue	p. 165
Summary and Conclusions	p. 169
Appendix	p. 171
Notes	p. 173
References	p. 175
Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study	p. 177
Introduction	p. 177
Structure of the Auctions	p. 178
First-Price Auctions	p. 178
Second-Price/English Auctions	p. 181
Subjects	p. 181
Theoretical Predictions	p. 182
First-Price Auctions	p. 182
Second-Price/English Auctions	p. 186
Experimental Results	p. 187
First-Price Auctions	p. 187
Second-Price/English Auctions	p. 197
Summary and Conclusions	p. 202
	p. 203
Derivation of Risk-Neutral Nash Bid Function	p. 204
Notes	p. 205
References	p. 209
Revenue Effects and Information Processing in English Common Value Auctions	p. 210
Structure of the Auctions	p. 211
Theoretical Considerations	p. 213
Factors Promoting Revenue Raising in English Auctions	p. 213
Forces Inhibiting Revenue Raising in English Auctions	p. 216
Experimental Results	p. 217
Revenue Effects of English Auctions	p. 217
Bidding Behavior in English Auctions	p. 221
Relationship to Field Data	p. 232
Summary and Conclusions	p. 232
Derivation of Equilibrium Bid Functions	p. 234
Full Information Maximum Likelihood Estimates	p. 236
Notes	p. 240
References	p. 243
Common Value Auctions with Insider Information	p. 245
Structure of the Auctions	p. 246
Theoretical Considerations	p. 247
The Winner's Curse	p. 248
Auctions with Symmetric Information Structure (SIS)	p. 249
Auctions with Asymmetric Information Structure (AIS)	p. 249
Experimental Results	p. 251
Auctions with Inexperienced Bidders	p. 251
Super-Experienced Bidders	p. 256
Learning and Adjustments in Insider's Bids over Time	p. 261
Summary and Conclusions	p. 263
Appendix: Increases in Expected Revenue in Auctions with Insider Information	p. 264
Notes	p. 265
References	p. 268
Can the Seller Benefit from an Insider in Common-Value Auctions?	p. 270
Introduction	p. 270
The Model	p. 271
Environments of No Private Information	p. 272
Homogeneous Private Information	p. 273
Heterogeneous Bidders I: Partitioned Information	p. 274
Heterogeneous Bidders II: Nonpartitioned Information	p. 275
Discussion	p. 276
Conclusion	p. 281
Appendix	p. 281
Notes	p. 282
References	p. 282
Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation	p. 284
Introduction	p. 284
The Base Model	p. 285
Equilibrium Analysis	p. 286
Revenue Comparisons	p. 289
Experimental Design	p. 290
Experimental Hypotheses	p. 292
Experimental Results	p. 295
Summary and Conclusion	p. 304
Appendix	p. 305
Notes	p. 308
References	p. 310
Learning in Common Value Auctions: Some Initial Observations	p. 311
Introduction	p. 311
Experimental Design	p. 312
Theoretical Considerations: Measures of Learning and Adjustment	p. 315
Experimental Results	p. 316
The Data to Be Explained: Adjustments in Bidding over Time in First-Price Auctions	p. 316
Market Adjustments: Self-Selection among Returning Bidders	p. 319
Learning/Adjustment Mechanisms for Individual Bidders	p. 322
Summary	p. 329
Notes	p. 330
References	p. 331
Cross-Game Learning: Experimental Evidence from First-Price and English Common Value Auctions	p. 332
Introduction	p. 332
Experimental Procedures and Performance Measures	p. 333
Experimental Results	p. 334
Analysis and Conclusions	p. 337
Notes	p. 338
References	p. 339
A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis	p. 340
Structure of the Auctions	p. 341
Theoretical Considerations	p. 341
Experimental Results	p. 342
Experiments with N = 4	p. 342
Effects of Changing N and Public Information	p. 345
Conclusion and Discussion	p. 346
Notes	p. 347
References	p. 348
Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Curse	p. 349
Introduction	p. 349
Bidding Structure, Industry Characteristics, and Sample Data	p. 351
Theoretical Considerations	p. 351
Bid Distribution Characteristics of Sample Data	p. 354
Differences in Auction Structure between Theory and Practice	p. 358
Mechanisms for Escaping the Winner's Curse	p. 359
Avoiding the Winner's Curse: Situation-Specific Learning	p. 361
Private Value/Chance Elements in Bidding	p. 361
Industry-Specific Characteristics and Their Relationship to Auction Theory	p. 362
Summary and Conclusions	p. 364
Appendix: Variation in Subcontractor Bids to General Contractors	p. 365
Notes	p. 368
References	p. 368
Instructions	p. 370
Index	p. 395
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