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A model of descending auction with hidden starting price and endogenous price decrease

Di Gaetano, Luigi (2011): A model of descending auction with hidden starting price and endogenous price decrease.

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Abstract

Several new auction formats are spreading over the Internet. They have usually the aim of raising revenues by increasing the number of participant, who will pay a participation fee, rather than selling the object at the highest possible price.

The aim of this paper is to study a format of descending price auction with hidden starting price and endogenous price decrease. In this format, usually known as price reveal auction, the price is hidden and players have to pay a fee to observe it. The price decreases only if a bidder observes it and not because of the time, like in the usual Dutch format.

In the following pages, we will analyse the effect of the concealment of the price in a standard Dutch auction. We will, then, define a model for price reveal auction, and analyse its most important aspects. We will, finally, derive players' best strategy and the Nash equilibrium of the game. Our result is that players use a threshold strategy to decide whether or not participate the auction (observe the price and pay the fixed fee). However, in our model there is not a separating equilibrium.

Moreover, we will find that there is a process of beliefs updating, which takes account of the time as a signal of the price. Therefore, if the game continues, players infer that the price is too high and update their beliefs accordingly.

We will finally compare our theoretical results with empirical data about 135 price reveal auctions held between December 2009 and April 2011 on the website Bidster.com.

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