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Auctions with Externalities: An Experimental Study

Author

Listed:
  • Chulyoung Kim

    (Yonsei University)

  • Sang-Hyun Kim

    (Yonsei University)

  • Jinhyuk Lee

    (Korea University)

  • Jaeok Park

    (Yonsei University)

Abstract

We consider a simple auction setting where there are three bidders and one of the bidders creates positive or negative externalities on the other two bidders. We theoretically and experimentally compare two auction formats, the first-price auction (FPA) and the second-price auction (SPA), in our setting. 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 the SPA, and this leads to higher revenues and lower efficiency in the SPA than in the FPA, especially under negative externalities. With incomplete information, we observe similar tendencies, while we obtain no evidence for learning effects.

Suggested Citation

  • Chulyoung Kim & Sang-Hyun Kim & Jinhyuk Lee & Jaeok Park, 2023. "Auctions with Externalities: An Experimental Study," Working papers 2023rwp-214, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2023rwp-214
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    References listed on IDEAS

    as
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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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