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Explaining deviations from equilibrium in auctions with avoidable fixed costs

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  • Elmaghraby, Wedad J.
  • Larson, Nathan

Abstract

Bidders often face avoidable fixed costs or other synergies that can make bidding decisions complex and risky, and market outcomes volatile. If bidders deviate from risk neutral best responses, either due to faulty optimization or a preference to avoid volatility, then equilibrium predictions can perform poorly. In this paper, we confront laboratory bidders with three auction formats that make bidding difficult in different ways. We find that measures of ‘difficulty’ provide a consistent explanation of deviations from best response bidding across the three formats.

Suggested Citation

  • Elmaghraby, Wedad J. & Larson, Nathan, 2012. "Explaining deviations from equilibrium in auctions with avoidable fixed costs," Games and Economic Behavior, Elsevier, vol. 76(1), pages 131-159.
    • Handle: RePEc:eee:gamebe:v:76:y:2012:i:1:p:131-159
    DOI: 10.1016/j.geb.2012.06.002
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    References listed on IDEAS

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    1. Ke Liu & Xiaoxuan Meng, 2021. "Exclusive dealing when upstream displacement is possible," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 830-843, November.

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    More about this item

    Keywords

    Auctions; Experimental; Procurement; Synergies; Asymmetric bidders; Learning; Optimization errors;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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