Bidder Preferences among Auction Institutions

By Ivanova-Stenzel, Radosveta; Salmon, Timothy C. | Economic Inquiry, April 2004 | Go to article overview

Bidder Preferences among Auction Institutions


Ivanova-Stenzel, Radosveta, Salmon, Timothy C., Economic Inquiry


I. INTRODUCTION

Auctions have become a pervasive method of exchange in the online world as each day thousands of auctions take place online and this trade volume totals to billions of dollars worth of goods per year. (1) This large volume of auction transactions implies the existence of a large number of sellers competing for buyers. The obvious implication is that the competition among the sellers for the pool of potential buyers can be fierce, and any competitive edge a seller can find could be important. One such competitive edge a seller might exploit is using an auction design that attracts bidders away from their competitors.

When designing a real auction or modeling a theoretical one, the entry decision of prospective bidders is rarely considered. Most auction analysis is performed assuming that a certain number of bidders will participate for certain or perhaps that the number of bidders is unknown and randomly determined. It should be clear however, that the most crucial part of a successful auction is encouraging as many bidders as possible to participate. In general this should be expected to have a positive effect on revenue (at least in noncommon value environments), and in certain types of auctions it may help combat the possibility of bidder collusion. Because there are typically competing auctions available for similar goods or even outside options that bidders can pursue when auctions are for unique goods, it is important to understand how the aspects of an auction format can effect the entry decision of a bidder.

Consider a bidder who is faced with the choice of entering one of two auctions for similar or even identical objects. How does this bidder make the decision of which auction to enter? The obvious answer is that the bidder will enter into the auction that maximizes his or her expected utility so long as that expected utility is greater than some reservation value. The real question, then, is how are these expected utilities constructed? Profit from participating in the auction is an obvious argument. There are also a number of environmental considerations that might effect this decision that would be difficult to account for precisely, such as the reputation and trustworthiness of the auctioneer, quality of the advertisement for the auction, and things of this nature. It is also possible that the format of the auction itself can have an impact on the preferences of the bidder. This latter point will be the issue of this study. The particular focus will be looking at bidder preferences between the two most common standard auction formats used in the field; the sealed bid first price (will be abbreviated as just the sealed bid auction) and the ascending or English auction. The other reason we are interested in comparing these two auction formats rather than the ascending and second price or first price and descending is that it seems reasonable to expect bidders to have preferences between the two due to the strategic differences between them. Such differences lead to substantial differences in terms of the difficulty of deciding how to bid and also in the possibility that an outcome leads to a bidder experiencing some form of regret. Regret may occur in a first price auction when a bidder loses to a bid that is below his value as he may think that if only he had bid higher, he could have won. Although such feelings of regret may be considered irrational, that does not preclude their existence. Such a scenario should not reasonably occur in an ascending auction.

If one considers the situation of a bidder choosing between two auctions that differ only in regard to whether the auction is being conducted according to an ascending or sealed bid format, it is not immediately obvious which would be the most preferred even assuming a standard symmetric independent private values environment. Were all bidders risk-neutral, then of course revenue equivalence would hold and the bidders would be indifferent. …

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