Common value auctions and the winner's curse / John H. Kagel and Dan Levin.

Format:

Book

Author/Creator:

Kagel, John H. (John Henry), 1942-

Contributor:

Levin, Dan, 1947-

Sabin W. Colton, Jr., Memorial Fund.

Language:

English

Subjects (All):

Auctions.

Paradoxes.

Value.

Physical Description:

xvi, 401 pages : illustrations ; 25 cm

Place of Publication:

Princeton, N.J. : Princeton University Press, [2002]

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.

Contents:

1. Bidding in Common Value Auctions: A Survey of Experimental Research / John H. Kagel, Dan Levin 1

1. An Initial Experiment Demonstrating the Winner's Curse 4

2. Sealed-Bid Auctions 5

2.1 Theoretical Considerations: First-Price Sealed-Bid Auctions 6

2.2 Some Initial Experimental Results: Inexperienced Bidders 7

2.3 Auctions with Moderately Experienced Bidders and the Effects of Public Information on Sellers' Revenue 7

2.4 Is the Winner's Curse a Laboratory Artifact? Limited Liability for Losses 13

2.5 Second-Price Sealed-Bid Auctions 16

2.6 Group versus Individual Bids 20

3. English Auctions and First-Price Auctions with Insider Information 23

3.1 English Auctions 24

3.2 Auctions with Insider Information 27

4. The Winner's Curse in Other Settings 33

4.1 The Winner's Curse in Bilateral Bargaining Games 33

4.2 The Winner's Curse in "Blind-Bid" Auctions 36

4.3 Lemons and Ripoffs: The Winner's Curse in Markets with Quality Endogenously Determined 39

4.4 The Swing Voter's Curse 40

5. How Do Bidders Learn to Overcome the Winner's Curse? 47

5.1 Bilateral Bargaining Games 47

5.2 Inexperienced Bidders in Sealed-Bid Auctions 48

5.3 Super-Experienced Bidders in Sealed-Bid Auctions 51

5.4 The Role of Information Feedback on Learning 52

6. Comparing Results from Field Studies with Experiments 53

6.1 Direct Comparisons between Laboratory and Field Data 56

6.2 Differences in Structure between Laboratory and Field Auctions 58

7.1 Summary of Empirical Findings from the Laboratory 60

7.2 Theory Motivated by Experiments 62

7.3 Auction Theory and Experiments at Work: Airwave Rights Auctions 65

2. First-Price Common Value Auctions: Bidder Behavior and the "Winner's Curse" / John H. Kagel, Dan Levin, Raymond C. Battalio, Donald J. Meyer 85

2. Structure of the Auctions 86

3. Theoretical Considerations and the Winner's Curse 87

4. Experimental Results 89

4.1 Market Outcomes 89

4.2 Individual Bidding Behavior over Time 93

Appendix Inexperienced Bidders in Second-Price Common Value Auctions 101

3. The Winner's Curse and Public Information in Common Value Auctions / John H. Kagel, Dan Levin 107

1. Structure of the Auctions 108

1.1 Basic Auction Structure 108

1.2 Auctions with Public Information 112

1.3 Varying Numbers of Bidders 113

1.4 The Experience Factor 113

2. Theoretical Considerations 114

2.1 Private Information Conditions 114

2.2 Effects of Public Information 116

2.3 Summary of Research Questions of Primary Interest 118

3. Experimental Results 119

3.1 Bidding Patterns with Private Information 119

3.2 Effects of Public Information on Seller's Revenues 127

3.3 Summary of Experimental Outcomes of Primary Interest 131

4. Toward Generalizability: But Is This How the Real World Operates? 131

Addendum: Benchmark Equilibrium for First-Price Auctions with Public Information 141

4. Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions / John H. Kagel, Dan Levin, Ronald M. Harstad 149

2. Structure of the Auctions 152

2.1 Basic Auction Structure 152

2.2 Auctions with Public Information 152

2.3 Subject Experience and Varying Numbers of Bidders 153

3. Theoretical Considerations 154

3.1 Naive Bidding under Private Information Conditions: A Model of the Winner's Curse 154

3.2 Nash Equilibrium Bidding under Private Information Conditions 155

3.3 Naive Bidding under Public Information Conditions 156

3.4 Nash Equilibrium Bidding under Public Information Conditions 157

4. Experimental Results 160

4.1 Bidding Patterns with Private Information 160

4.2 Effects of Public Information on Revenue 165

5. Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study / John H. Kagel, Ronald M. Harstad, Dan Levin 177

2. Structure of the Auctions 178

2.1 First-Price Auctions 178

2.2 Second-Price/English Auctions 181

2.3 Subjects 181

3. Theoretical Predictions 182

3.1 First-Price Auctions 182

3.2 Second-Price/English Auctions 186

4. Experimental Results 187

4.1 First-Price Auctions 187

4.2 Second-Price/English Auctions 197

Appendix B Derivation of Risk-Neutral Nash Bid Function 204

6. Revenue Effects and Information Processing in English Common Value Auctions / Dan Levin, John H. Kagel, Jean-Francois Richard 210

1. Structure of the Auctions 211

2. Theoretical Considerations 213

2.1 Factors Promoting Revenue Raising in English Auctions 213

2.2 Forces Inhibiting Revenue Raising in English Auctions 216

3. Experimental Results 217

3.1 Revenue Effects of English Auctions 217

3.2 Bidding Behavior in English Auctions 221

4. Relationship to Field Data 232

Appendix A Derivation of Equilibrium Bid Functions 234

Appendix B Full Information Maximum Likelihood Estimates 236

7. Common Value Auctions with Insider Information / John H. Kagel, Dan Levin 245

1. Structure of the Auctions 246

2. Theoretical Considerations 247

2.1 The Winner's Curse 248

2.2 Auctions with Symmetric Information Structure (SIS) 249

2.3 Auctions with Asymmetric Information Structure (AIS) 249

3. Experimental Results 251

3.1 Auctions with Inexperienced Bidders 251

3.2 Super-Experienced Bidders 256

3.3 Learning and Adjustments in Insider's Bids over Time 261

Appendix Increases in Expected Revenue in Auctions with Insider

Information 264

8. Can the Seller Benefit from an Insider in Common-Value Auctions? / Colin Campbell, Dan Levin 270

2. The Model 271

2.1 Environments of No Private Information 272

2.2 Homogeneous Private Informaion 273

2.3 Heterogeneous Bidders I: Partitioned Information 274

2.4 Heterogeneous Bidders II: Nonpartitioned Information 275

9. Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation / Christopher Avery, John H. Kagel 284

2. The Base Model 285

2.1 Equilibrium Analysis 286

2.2 Revenue Comparisons 289

3. Experimental Design 290

4. Experimental Hypotheses 292

5. Experimental Results 295

10. Learning in Common Value Auctions: Some Initial Observations / Susan Garvin, John H. Kagel 311

2. Experimental Design 312

3. Theoretical Considerations: Measures of Learning and Adjustment 315

4. Experimental Results 316

4.1 The Data to Be Explained: Adjustments in Bidding over Time in First-Price Auctions 316

4.2 Market Adjustments: Self-Selection among Returning Bidders 319

4.3 Learning/Adjustment Mechanisms for Individual Bidders 322

11. Cross-Game Learning: Experimental Evidence from First-Price and English Common Value Auctions / John H. Kagel 332

2. Experimental Procedures and Performance Measures 333

3. Experimental Results 334

4. Analysis and Conclusions 337

12. A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis / Douglas Dyer, John H. Kagel, Dan Levin 340

1. Structure of the Auctions 341

2. Theoretical Considerations 341

3. Experimental Results 342

3.1 Experiments with N = 4 342

3.2 Effects of Changing N and Public Information 345

13. Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Curse / Douglas Dyer, John H. Kagel 349

2. Bidding Structure, Industry Characteristics, and Sample Data 351

3. Theoretical Considerations 351

4. Bid Distribution Characteristics of Sample Data 354

5. Differences in Auction Structure between Theory and Practice 358

5.1 Mechanisms for Escaping the Winner's Curse 359

5.2 Avoiding the Winner's Curse: Situation-Specific Learning 361

5.3 Private Value/Chance Elements in Bidding 361

6. Industry-Specific Characteristics and Their Relationship to Auction Theory 362

Appendix Variation in Subcontractor Bids to General Contractors 365.

Notes:

Includes bibliographical references and index.

Local Notes:

Acquired for the Penn Libraries with assistance from the Sabin W. Colton, Jr., Memorial Fund.

ISBN:

0691016674

OCLC:

49638477

Online:

Publisher description