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Dutch vs. First-Price Auctions With Expectations-Based Loss-Averse Bidders

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  • Benjamin Balzer
  • Antonio Rosato
  • Jonas von Wangenheim

Abstract

We study Dutch and first-price auctions with expectations-based loss-averse bidders and show that the strategic equivalence between these formats no longer holds. Intuitively, as the Dutch auction unfolds, a bidder becomes more optimistic about her chances of winning; this stronger "attachment" effect pushes her to bid more aggressively than in the first-price auction. Thus, Dutch auctions raise more revenue than first-price ones. Indeed, the Dutch auction raises the most revenue among standard auction formats. Our results imply that dynamic mechanisms that make bidders more optimistic raise more revenue, thereby ratio- nalizing the use of descending-price mechanisms by sellers in this field.

Suggested Citation

  • Benjamin Balzer & Antonio Rosato & Jonas von Wangenheim, 2021. "Dutch vs. First-Price Auctions With Expectations-Based Loss-Averse Bidders," CRC TR 224 Discussion Paper Series crctr224_2021_314, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2021_314
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    More about this item

    Keywords

    Loss Aversion; Dutch Auctions; Revenue Equivalence; Personal Equilibrium;
    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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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