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First-Price and Second-Price Auctions with Externalities: An Experimental Study

Author

Listed:
  • Sang-Hyun Kim

    (Yonsei University)

  • Chulyoung Kim

    (Yonsei University)

  • Jaeok Park

    (Yonsei University)

  • Jinhyuk Lee

    (Korea University)

Abstract

We consider a scenario where a single indivisible object is auctioned off to three bidders and among the three bidders there is one bidder whose winning imposes a positive or negative externality on the other two bidders. We theoretically and experimentally compare two standard sealed-bid auction formats, first-price and second-price auctions, under complete information. Using a refinement of undominated Nash equilibria, we analyze equilibrium bids and outcomes in the two auction formats. Our experimental results show that overbidding relative to equilibrium bids is prevalent, especially in second-price auctions, and this leads to higher revenue and lower efficiency in secondprice auctions than in first-price auctions, especially under negative externalities. Our results are consistent with previous experimental findings that bidders tend to overbid more in second-price auctions than in first-price auctions, and they suggest that such a tendency is robust to the introduction of externalities.

Suggested Citation

  • Sang-Hyun Kim & Chulyoung Kim & Jaeok Park & Jinhyuk Lee, 2022. "First-Price and Second-Price Auctions with Externalities: An Experimental Study," Working papers 2022rwp-199, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2022rwp-199
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    References listed on IDEAS

    as
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    2. DavidJ. Cooper & Hanming Fang, 2008. "Understanding Overbidding In Second Price Auctions: An Experimental Study," Economic Journal, Royal Economic Society, vol. 118(532), pages 1572-1595, October.
    3. Bartling, Björn & Netzer, Nick, 2016. "An externality-robust auction: Theory and experimental evidence," Games and Economic Behavior, Elsevier, vol. 97(C), pages 186-204.
    4. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
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    More about this item

    Keywords

    auctions; externalities; experiments; overbidding; efficiency.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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