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Common Value Auctions and the Winner's Curse - John H. Kagel

Common Value Auctions and the Winner's Curse

Hardcover Published: 11th August 2002
ISBN: 9780691016672
Number Of Pages: 424

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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.

Industry Reviews

"This book shows that the kind of winner's curse at issue is pervasive across various types of auctions and is not eliminated by experience or even by using expert bidders. One of its main contributions is the specification of na ve bidding models that explain patterns of deviations from (Nash) theoretical predictions. The ex post perspectives about how to improve experimental designs and procedures for dealing with bankruptcies were particularly interesting."--Charles A. Holt, University of Virginia
"I know of no book that offers such a comprehensive treatment of theory and experiments in common value auctions. The papers it brings together represent very significant contributions to both auction theory and auction behavior and are of the highest quality."--Douglas Davis, Virginia Commonwealth University

Prefacep. xiii
Creditsp. xv
Bidding in Common Value Auctions: A Survey of Experimental Researchp. 1
An Initial Experiment Demonstrating the Winner's Cursep. 4
Sealed-Bid Auctionsp. 5
Theoretical Considerations: First-Price Sealed-Bid Auctionsp. 6
Some Initial Experimental Results: Inexperienced Biddersp. 7
Auctions with Moderately Experienced Bidders and the Effects of Public Information on Sellers' Revenuep. 7
Is the Winner's Curse a Laboratory Artifact? Limited Liability for Lossesp. 13
Second-Price Sealed-Bid Auctionsp. 16
Group versus Individual Bidsp. 20
Summing Upp. 22
English Auctions and First-Price Auctions with Insider Informationp. 23
English Auctionsp. 24
Auctions with Insider Informationp. 27
The Winner's Curse in Other Settingsp. 33
The Winner's Curse in Bilateral Bargaining Gamesp. 33
The Winner's Curse in "Blind-Bid" Auctionsp. 36
Lemons and Ripoffs: The Winner's Curse in Markets with Quality Endogenously Determinedp. 39
The Swing Voter's Cursep. 40
Summing Upp. 46
How Do Bidders Learn to Overcome the Winner's Curse?p. 47
Bilateral Bargaining Gamesp. 47
Inexperienced Bidders in Sealed-Bid Auctionsp. 48
Super-Experienced Bidders in Sealed-Bid Auctionsp. 51
The Role of Information Feedback on Learningp. 52
Comparing Results from Field Studies with Experimentsp. 53
Direct Comparisons between Laboratory and Field Datap. 56
Differences in Structure between Laboratory and Field Auctionsp. 58
Summing Upp. 60
Concluding Remarksp. 60
Summary of Empirical Findings from the Laboratoryp. 60
Theory Motivated by Experimentsp. 62
Auction Theory and Experiments at Work: Airwave Rights Auctionsp. 65
Overview of What Followsp. 66
First-Price Common Value Auctions: Bidder Behavior and the "Winner's Curse"p. 85
Introductionp. 85
Structure of the Auctionsp. 86
Theoretical Considerations and the Winner's Cursep. 87
Experimental Resultsp. 89
Market Outcomesp. 89
Individual Bidding Behavior over Timep. 93
Summary and Conclusionsp. 100
Inexperienced Bidders in Second-Price Common Value Auctionsp. 101
Notesp. 104
Referencesp. 105
The Winner's Curse and Public Information in Common Value Auctionsp. 107
Structure of the Auctionsp. 108
Basic Auction Structurep. 108
Auctions with Public Informationp. 112
Varying Numbers of Biddersp. 113
The Experience Factorp. 113
Theoretical Considerationsp. 114
Private Information Conditionsp. 114
Effects of Public Informationp. 116
Summary of Research Questions of Primary Interestp. 118
Experimental Resultsp. 119
Bidding Patterns with Private Informationp. 119
Effects of Public Information on Seller's Revenuesp. 127
Summary of Experimental Outcomes of Primary Interestp. 131
Toward Generalizability: But Is This How the Real World Operates?p. 131
Conclusionsp. 134
Notesp. 136
Referencesp. 140
Addendum: Benchmark Equilibrium for First-Price Auctions with Public Informationp. 141
Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctionsp. 149
Introductionp. 149
Structure of the Auctionsp. 152
Basic Auction Structurep. 152
Auctions with Public Informationp. 152
Subject Experience and Varying Numbers of Biddersp. 153
Theoretical Considerationsp. 154
Naive Bidding under Private Information Conditions: A Model of the Winner's Cursep. 154
Nash Equilibrium Bidding under Private Information Conditionsp. 155
Naive Bidding under Public Information Conditionsp. 156
Nash Equilibrium Bidding under Public Information Conditionsp. 157
Experimental Resultsp. 160
Bidding Patterns with Private Informationp. 160
Effects of Public Information on Revenuep. 165
Summary and Conclusionsp. 169
Appendixp. 171
Notesp. 173
Referencesp. 175
Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Studyp. 177
Introductionp. 177
Structure of the Auctionsp. 178
First-Price Auctionsp. 178
Second-Price/English Auctionsp. 181
Subjectsp. 181
Theoretical Predictionsp. 182
First-Price Auctionsp. 182
Second-Price/English Auctionsp. 186
Experimental Resultsp. 187
First-Price Auctionsp. 187
Second-Price/English Auctionsp. 197
Summary and Conclusionsp. 202
Appendix Ap. 203
Derivation of Risk-Neutral Nash Bid Functionp. 204
Notesp. 205
Referencesp. 209
Revenue Effects and Information Processing in English Common Value Auctionsp. 210
Structure of the Auctionsp. 211
Theoretical Considerationsp. 213
Factors Promoting Revenue Raising in English Auctionsp. 213
Forces Inhibiting Revenue Raising in English Auctionsp. 216
Experimental Resultsp. 217
Revenue Effects of English Auctionsp. 217
Bidding Behavior in English Auctionsp. 221
Relationship to Field Datap. 232
Summary and Conclusionsp. 232
Derivation of Equilibrium Bid Functionsp. 234
Full Information Maximum Likelihood Estimatesp. 236
Notesp. 240
Referencesp. 243
Common Value Auctions with Insider Informationp. 245
Structure of the Auctionsp. 246
Theoretical Considerationsp. 247
The Winner's Cursep. 248
Auctions with Symmetric Information Structure (SIS)p. 249
Auctions with Asymmetric Information Structure (AIS)p. 249
Experimental Resultsp. 251
Auctions with Inexperienced Biddersp. 251
Super-Experienced Biddersp. 256
Learning and Adjustments in Insider's Bids over Timep. 261
Summary and Conclusionsp. 263
Increases in Expected Revenue in Auctions with Insider
Informationp. 264
Notesp. 265
Referencesp. 268
Can the Seller Benefit from an Insider in Common-Value Auctions?p. 270
Introductionp. 270
The Modelp. 271
Environments of No Private Informationp. 272
Homogeneous Private Informaionp. 273
Heterogeneous Bidders I: Partitioned Informationp. 274
Heterogeneous Bidders II: Nonpartitioned Informationp. 275
Discussionp. 276
Conclusionp. 281
Appendixp. 281
Notesp. 282
Referencesp. 282
Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigationp. 284
Introductionp. 284
The Base Modelp. 285
Equilibrium Analysisp. 286
Revenue Comparisonsp. 289
Experimental Designp. 290
Experimental Hypothesesp. 292
Experimental Resultsp. 295
Summary and Conclusionp. 304
Appendixp. 305
Notesp. 308
Referencesp. 310
Learning in Common Value Auctions: Some Initial Observationsp. 311
Introductionp. 311
Experimental Designp. 312
Theoretical Considerations: Measures of Learning and Adjustmentp. 315
Experimental Resultsp. 316
The Data to Be Explained: Adjustments in Bidding over Time in First-Price Auctionsp. 316
Market Adjustments: Self-Selection among Returning Biddersp. 319
Learning/Adjustment Mechanisms for Individual Biddersp. 322
Summaryp. 329
Notesp. 330
Referencesp. 331
Cross-Game Learning: Experimental Evidence from First-Price and English Common Value Auctionsp. 332
Introductionp. 332
Experimental Procedures and Performance Measuresp. 333
Experimental Resultsp. 334
Analysis and Conclusionsp. 337
Notesp. 338
Referencesp. 339
A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysisp. 340
Structure of the Auctionsp. 341
Theoretical Considerationsp. 341
Experimental Resultsp. 342
Experiments with N = 4p. 342
Effects of Changing N and Public Informationp. 345
Conclusion and Discussionp. 346
Notesp. 347
Referencesp. 348
Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Cursep. 349
Introductionp. 349
Bidding Structure, Industry Characteristics, and Sample Datap. 351
Theoretical Considerationsp. 351
Bid Distribution Characteristics of Sample Datap. 354
Differences in Auction Structure between Theory and Practicep. 358
Mechanisms for Escaping the Winner's Cursep. 359
Avoiding the Winner's Curse: Situation-Specific Learningp. 361
Private Value/Chance Elements in Biddingp. 361
Industry-Specific Characteristics and Their Relationship to Auction Theoryp. 362
Summary and Conclusionsp. 364
Variation in Subcontractor Bids to General Contractorsp. 365
Notesp. 368
Referencesp. 368
Instructionsp. 370
Indexp. 395
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780691016672
ISBN-10: 0691016674
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 424
Published: 11th August 2002
Country of Publication: US
Dimensions (cm): 23.93 x 16.46  x 3.05
Weight (kg): 0.76