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First-price auctions, Dutch auctions, and buy-it-now-prices with Allais paradox bidders

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    (Department of Economics, University of Michigan)

Abstract

This paper investigates first-price and Dutch auctions when bidders have preferences exhibiting the Allais paradox. We characterize an equilibrium for both auctions, paying particular attention to the dynamic inconsistency problems which can arise with such preferences. We show that the Dutch auction systematically yields a higher revenue than the first-price auction. This stands in sharp contrast with the presumption that these auctions are strategically equivalent, which is indeed valid in the expected utility case. We also show that introducing a "buy-it-now-price" to the first-price auction increases seller's expected revenue when bidders have Allais paradox preference while it does not for expected-utility maximizers.

Suggested Citation

  • ,, 2011. "First-price auctions, Dutch auctions, and buy-it-now-prices with Allais paradox bidders," Theoretical Economics, Econometric Society, vol. 6(3), September.
    • Handle: RePEc:the:publsh:502
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    Citations

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    Cited by:

    1. Oliver Kirchkamp & Wladislaw Mill, 2019. "Spite vs. risk: explaining overbidding," CESifo Working Paper Series 7631, CESifo.
    2. Fugger, Nicolas & Gillen, Philippe & Rasch, Alexander & Zeppenfeld, Christopher, 2016. "Preferences and Decision Support in Competitive Bidding," VfS Annual Conference 2016 (Augsburg): Demographic Change 145849, Verein für Socialpolitik / German Economic Association.
    3. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    4. Evren, Özgür, 2019. "Recursive non-expected utility: Connecting ambiguity attitudes to risk preferences and the level of ambiguity," Games and Economic Behavior, Elsevier, vol. 114(C), pages 285-307.
    5. Yusufcan Masatlioglu & Sarah Taylor & Neslihan Uler, 2012. "Behavioral mechanism design: evidence from the modified first-price auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 16(2), pages 159-173, September.
    6. Auster, Sarah & Kellner, Christian, 2022. "Robust bidding and revenue in descending price auctions," Journal of Economic Theory, Elsevier, vol. 199(C).
    7. Kirchkamp, Oliver & Mill, Wladislaw, 2021. "Spite vs. risk: Explaining overbidding in the second-price all-pay auction," Games and Economic Behavior, Elsevier, vol. 130(C), pages 616-635.
    8. Balzer, Benjamin & Rosato, Antonio & von Wangenheim, Jonas, 2022. "Dutch vs. first-price auctions with expectations-based loss-averse bidders," Journal of Economic Theory, Elsevier, vol. 205(C).
    9. Daniel R. Burghart, 2020. "The two faces of independence: betweenness and homotheticity," Theory and Decision, Springer, vol. 88(4), pages 567-593, May.
    10. Eisenhuth, Roland, 2010. "Auction Design with Loss Averse Bidders: The Optimality of All Pay Mechanisms," MPRA Paper 23357, University Library of Munich, Germany.
    11. Dillenberger, David & Raymond, Collin, 2019. "On the consensus effect," Journal of Economic Theory, Elsevier, vol. 183(C), pages 384-416.

    More about this item

    Keywords

    Dutch auctions (descending auctions); Allais paradox; buy-it-now-prices;
    All these keywords.

    JEL classification:

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

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