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Reference-Dependent Bidding in Dynamic Auctions

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  • Ott, Marion
  • Ehrhart, Karl-Martin

Abstract

We investigate equilibrium bidding behavior of bidders with reference-dependent preferences and independent private values in single-unit English and Dutch clock auctions. Bidders' reference points are endogenous and determined by their strategy and their beliefs about the other bidders. In deriving their strategy, bidders anticipate changes in their reference point due to updated information about others' values (i.e., the own winning probability) during the course of the auction, and make optimal binary decisions at each price (approve or quit in the English auction and wait or bid in the Dutch auction). First, we solve for personal equilibrium profiles, i.e., profiles of bids that contain for each bidder a bidding strategy that is optimal given the others' bidding strategies and the reference point induced by the own and others' strategies. Second, we consider locally preferred personal equilibrium (LPPE) profiles, i.e., personal equilibrium profiles where no bidder can locally find a better personal equilibrium given the others' fixed strategies by varying his reference point via considering different own strategies. The expected revenue in the Dutch auction is higher than in the English auction in the respective unique LPPE profiles. The difference is mainly driven by the aversion to losing the item in the Dutch auction.

Suggested Citation

  • Ott, Marion & Ehrhart, Karl-Martin, 2014. "Reference-Dependent Bidding in Dynamic Auctions," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100591, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100591
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. von Wangenheim, Jonas, 2019. "English versus Vickrey auctions with loss averse bidders," Discussion Papers 2019/1, Free University Berlin, School of Business & Economics.
    2. Benjamin Balzer & Antonio Rosato, 2018. "Expectations-Based Loss Aversion in Common-Value Auctions: Extensive vs. Intensive Risk," Working Paper Series 50, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. 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.
    4. Rosato, Antonio, 2014. "Loss Aversion in Sequential Auctions: Endogenous Interdependence, Informational Externalities and the "Afternoon Effect"," MPRA Paper 56824, University Library of Munich, Germany.
    5. von Wangenheim, Jonas, 2021. "English versus Vickrey auctions with loss-averse bidders," Journal of Economic Theory, Elsevier, vol. 197(C).
    6. Dato, Simon & Müller, Daniel & Grunewald, Andreas, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112947, Verein für Socialpolitik / German Economic Association.
    7. Dato, Simon & Grunewald, Andreas & Müller, Daniel, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," Bonn Econ Discussion Papers 02/2015, University of Bonn, Bonn Graduate School of Economics (BGSE).
    8. von Wangenheim, Jonas, 2017. "English versus Vickrey Auctions with Loss Averse Bidders," Rationality and Competition Discussion Paper Series 48, CRC TRR 190 Rationality and Competition.
    9. Fugger, Nicolas & Gillen, Philippe & Riehm, Tobias, 2019. "Procurement design with loss averse bidders," ZEW Discussion Papers 19-060, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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