Theoretical and Experimental Analysis of Auctions with Negative Externalities

Hu, Youxin and Kagel, John and Xu, Xiaoshu and Ye, Lixin (2012): Theoretical and Experimental Analysis of Auctions with Negative Externalities.

Abstract

We investigate a private value auction in which a single "entrant" on winning imposes a negative externality on two "regular" bidders. In an English auction, when all bidders are active "regulars" free ride, exiting before price reaches their value. In a first-price sealed-bid auction incentives for free riding and aggressive bidding coexist, limiting free riding. We find substantial, though incomplete, free riding in the clock auction. In first-price auctions, regular bidders bid more aggressively than the "entrant" and both bid higher than in auctions with no externality. Predictions regarding revenue, efficiency, and successful entry between the two auctions are satisfied.

• Item Type: MPRA Paper
• Language: English
• Keywords: Auctions, externality, free riding, aggressive bidding, experiments.
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design

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