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The Role of Risk Preferences in Pay-to-Bid Auctions

Author

Listed:
  • Brennan C. Platt

    (Department of Economics, Brigham Young University, Provo, Utah 84602)

  • Joseph Price

    (Department of Economics, Brigham Young University, Provo, Utah 84602)

  • Henry Tappen

    (Microsoft Corporation, Redmond, Washington, 98052)

Abstract

We analyze a new auction format in which bidders pay a fee each time they increase the auction price. Bidding fees are the primary source of revenue for the seller but produce the same expected revenue as standard auctions (assuming risk-neutral bidders). If risk-loving preferences are incorporated in the model, expected revenue increases. Our model predicts a particular distribution of ending prices, which we test against observed auction data. The degree of fit depends on how unobserved parameters are chosen; in particular, a slight preference for risk has the biggest impact in explaining auction behavior, suggesting that pay-to-bid auctions are a mild form of gambling. This paper was accepted by Peter Wakker, decision analysis.

Suggested Citation

  • Brennan C. Platt & Joseph Price & Henry Tappen, 2013. "The Role of Risk Preferences in Pay-to-Bid Auctions," Management Science, INFORMS, vol. 59(9), pages 2117-2134, September.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:9:p:2117-2134
    DOI: 10.1287/mnsc.1120.1666
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    References listed on IDEAS

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    Cited by:

    1. Zhongmin Wang & Minbo Xu, 2016. "Empirical Evidence on Competition and Revenue in an All-Pay Contest," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(3), pages 429-448, November.
    2. Jin Li & Kwok Fai Tso & Fangtao Liu, 2017. "Profit earning and monetary loss bidding in online entertainment shopping: the impacts of bidding patterns and characteristics," Electronic Markets, Springer;IIM University of St. Gallen, vol. 27(1), pages 77-90, February.
    3. Wang, Zhongmin & Xu, Minbo, 2016. "Selling a dollar for more than a dollar? Evidence from online penny auctions," Information Economics and Policy, Elsevier, vol. 36(C), pages 53-68.
    4. Ødegaard, Fredrik & Anderson, Chris K., 2014. "All-pay auctions with pre- and post-bidding options," European Journal of Operational Research, Elsevier, vol. 239(2), pages 579-592.
    5. Paan Jindapon & Christopher Whaley, 2015. "Risk lovers and the rent over-investment puzzle," Public Choice, Springer, vol. 164(1), pages 87-101, July.
    6. Brünner, Tobias & Reiner, Jochen & Natter, Martin & Skiera, Bernd, 2019. "Prospect theory in a dynamic game: Theory and evidence from online pay-per-bid auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 215-234.
    7. Costa-Gomes, Miguel A. & Shimoji, Makoto, 2014. "Theoretical approaches to lowest unique bid auctions," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 16-24.
    8. Kim, Ju-Young & Brünner, Tobias & Skiera, Bernd & Natter, Martin, 2014. "A comparison of different pay-per-bid auction formats," International Journal of Research in Marketing, Elsevier, vol. 31(4), pages 368-379.
    9. Hinnosaar, Toomas, 2016. "Penny auctions," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 59-87.
    10. Minbo Xu & Sanxi Li & Jianye Yan, 2019. "All‐Pay Auctions With A Buy‐Price Option," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 617-630, January.
    11. Matthew W. McCarter & Abel M. Winn, 2013. "When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever," Working Papers 13-19, Chapman University, Economic Science Institute.
    12. Martin Spann & Robert Zeithammer & Marco Bertini & Ernan Haruvy & Sandy D. Jap & Oded Koenigsberg & Vincent Mak & Peter Popkowski Leszczyc & Bernd Skiera & Manoj Thomas, 2018. "Beyond Posted Prices: the Past, Present, and Future of Participative Pricing Mechanisms," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 121-136, March.
    13. Jindapon, Paan & Yang, Zhe, 2017. "Risk attitudes and heterogeneity in simultaneous and sequential contests," Journal of Economic Behavior & Organization, Elsevier, vol. 138(C), pages 69-84.
    14. Toomas Hinnosaar, 2013. "Penny Auctions are Unpredictable," Carlo Alberto Notebooks 305, Collegio Carlo Alberto.

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