Loss Aversion in Sequential Auctions: Endogenous Interdependence, Informational Externalities and the "Afternoon Effect"

Rosato, Antonio (2014): Loss Aversion in Sequential Auctions: Endogenous Interdependence, Informational Externalities and the "Afternoon Effect".

Abstract

Empirical evidence from sequential auctions shows that prices of identical goods tend to decline between rounds. In this paper, I show how expectations-based reference-dependent preferences and loss aversion can rationalize this phenomenon. I analyze two-round sealed-bid auctions with symmetric bidders having independent private values and unit demand. Equilibrium bids in the second round are history-dependent and subject to a "discouragement effect": the higher the winning bid in the first auction is, the less aggressive the behavior of the remaining bidders in the second auction. When choosing his strategy in the first round, however, a bidder conditions his bid on being pivotal and hence expects not to be discouraged. Equilibrium behavior, therefore, leads the winner of the first round to overestimate the bid of his highest opponent and hence the next-round price so that equilibrium prices decline. Moreover, sequential and simultaneous auctions are not bidder-payoff equivalent nor revenue equivalent.

• Item Type: MPRA Paper
• Language: English
• Keywords: Reference-Dependent Preferences; Loss Aversion; Sequential Auctions; Afternoon Effect.
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design

References

Abeler, J., A. Falk, L. Goette and D. Huffman (2011), "Reference Points and Effort Provision" American Economic Review, 101(2), 470--492.

Artstein-Avidan, S. and D. Dillenberger (2011), "Dynamic Disappointment Aversion" Mimeo.

Ashenfelter, O. (1989), "How Auctions Work for Wine and Art" Journal of Economic Perspectives, 3(3), 23-36.

Ashenfelter, O. and D. Genesove (1992), "Testing for Price Anomalies in Real-Estate Auctions" American Economic Review P&P, 82(2), 501-505.

Banerji, A. and N. Gupta (2014), "Detection, Identification and Estimation of Loss Aversion: Evidence from an Auction Experiment" American Economic Journal: Microeconomics, 6(1), 91-133.

Beggs, A. and K. Graddy (1997), "Declining Values and the Afternoon Effect: Evidence from Art Auctions" Rand Journal of Economics, 28(3), 544-565.

Bell, D. (1985), "Disappointment in Decision Making under Uncertainty" Operations Research, 33(1), 1-27.

Bernhardt, D. and D. Scoones (1994), "A Note on Sequential Auctions" American Economic Review, 84(3), 501-505.

Black, J. and D. de Meza (1992), "Systematic Price Differences between Successive Auctions are no Anomaly" Journal of Economics & Management Strategy, 1(4), 607-628.

Chakraborty, A., N. Gupta and R. Harbaugh (2006), "Best Foot Forward or Best for Last in a Sequential Auction?" Rand Journal of Economics, 37(1), 176-194.

Chanel, O., L.A. Gerard-Varet and S. Vincent (1996), "Auction Theory and Practice: Evidence from the Market for Jewelry" in (V. Ginsburgh and P.M. Menger, eds.) Economics of the Arts; Selected Essays, 135-149, Amsterdam: Elsevier.

Deltas, G. and G. Kosmopoulou (2004), "Bidding in Sequential Auctions: "Catalogue" vs. "Order-of-Sale" Effects" Economic Journal, 114(492), 28-54.

Eisenhuth, R. (2012), "Reference Dependent Mechanism Design" Mimeo.

Eisenhuth, R. and M. Ewers (2012), "Auctions with Loss Averse Bidders" Mimeo.

Engelbrecht-Wiggans, R. (1994), "Sequential Auctions of Stochastically Equivalent Objects" Economics Letters, 44(1-2), 87-90.

Ehrhart, K.M. and M. Ott (2014), "Reference-Dependent Bidding in Dynamic Auctions" Mimeo.

Ericson Marzilli, K.M. and A. Fuster (2011), "Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments" Quarterly Journal of Economics, 126(4), 1879-1907.

Eyster, E. (2002), "Rationalizing the Past: A Taste for Consistency" Mimeo.

Février, P., W. Roos and M. Visser (2005), "The Buyer's Option in Multi-Unit Ascending Auctions: The Case of Wine Auctions at Drouot" Journal of Economics & Management Strategy, 14(4), 813-847.

Février, P., L. Linnemer and M. Visser (2007), "Buy or Wait, That is the Option: The Buyer's Option in Sequential Laboratory Auctions" Rand Journal of Economics, 38(1), 98-118.

Gale, I. and D. Hausch (1994), "Bottom-Fishing and Declining Prices in Sequential Auctions" Games and Economic Behavior, 7(3), 318-331.

Gale, I. and M. Stegeman (2001), "Sequential Auctions of Endogenously Valued Objects" Games and Economic Behavior, 36(1), 74-103.

Gandal, N. (1997), "Sequential Auctions of Interdependent Objects: Israeli Cable Television Licenses" Journal of Industrial Economics, 45(3), 227-244.

Gill, D. and V. Prowse (2012), "A Structural Analysis of Disappointment Aversion in a Real Effort Competition" American Economic Review, 102(1), 469-503.

Ginsburgh, V. (1998) "Absentee Bidders and the Declining Price Anomaly in Wine Auctions"Journal of Political Economy, 106(6), 1302-1319.

Gul, F. (1991) "A Theory of Disappointment Aversion" Econometrica, 59(3), 667-686.

Herweg, F., D. Müller and P. Weinschenk (2010), "Binary Payment Schemes: Moral Hazard and Loss Aversion" American Economic Review, 100(5), 2451-2477.

Jeitschko, T. (1999), "Equilibrium Price Paths in Sequential Auctions with Stochastic Supply" Economics Letters, 64(1), 67-72.

Karle, H., G. Kirchsteiger and M. Peitz (forthcoming), "Loss Aversion and Consumption Choice: Theory and Experimental Evidence" American Economic Journal: Microeconomics.

Keser, C. and M. Olson (1996), "Experimental examination of the declining price anomaly" in (V. Ginsburgh and P.M. Menger, eds.), Economics of the Arts: Selected Essays, 151--76, Amsterdam: Elsevier.

Köszegi, B. and M. Rabin (2006), "A Model of Reference-Dependent Preferences" Quarterly Journal of Economics, 121(4), 1133-1165.

Köszegi, B. and M. Rabin (2007), "Reference-Dependent Risk Attitudes" American Economic Review, 97(4), 1047-1073.

Köszegi, B. and M. Rabin (2009), "Reference-Dependent Consumption Plans" American Economic Review, 99(3), 909-936.

Lambson, V. and N. Thurston (2006), "Sequential Auctions: Theory and Evidence from the Seattle Fur Exchange" Rand Journal of Economics, 37(1), 70-80.

Lange, A. and A. Ratan (2010), "Multi-dimensional Reference-dependent Preferences in Sealed-bid auctions: How (most) Laboratory Experiments Differ from the Field" Games and Economic Behavior, 68(2), 634-645.

Loomes, G. and R. Sudgen (1986), "Disappointment and Dynamic Consistency in Choice under Uncertainty" Review of Economic Studies, 53(2), 271-282.

McAfee, R.P. and D. Vincent (1993), "The Declining Price Anomaly" Journal of Economic Theory, 60(1), 191-212.

Menezes, F.M. and P.K. Monteiro (2003), "Synergies and Price Trends in Sequential Auctions" Review of Economic Design, 8(1), 85-98.

Mezzetti, C. (2011), "Sequential Auctions with Informational Externalities and Aversion to Price Risk: Decreasing and Increasing Price Sequences" Economic Journal, 121(555), 990-1016.

Mezzetti, C., A. Pekeč and I. Tsetlin (2008), "Sequential vs. Single-round Uniform-price Auctions" Games and Economic Behavior, 62(2), 591-609.

Milgrom, P. and R. Weber (1982): "A Theory of Auctions and Competitive Bidding" Econometrica, 50(5), 1089-1112.

Milgrom, P. and R. Weber (2000), "A Theory of Auctions and Competitive Bidding, II" in: Klemperer, P.D. (Ed.), The Economic Theory of Auctions, 179-194, Vol. 1, Edward Edgar, Cambridge, UK.

Neugebauer, T. and P. Pezanis-Christou (2007), "Bidding Behavior at Sequential First-price Auctions with(out) Supply Uncertainty: A Laboratory Analysis" Journal of Economic Behavior & Organization, 63(1), 55-72.

Novemsky, N. and D. Kahneman (2005), "The Boundaries of Loss Aversion" Journal of Marketing Research, 42(2), 119-128.

Pitchik, C. and A. Schotter (1988), "Perfect Equilibria in Budget-constrained Sequential Auctions: An Experimental Study" Rand Journal of Economics, 19(3), 363-388.

Ratan, A. (2013), "Reference-Dependent Preferences in Auctions: Theory and Experiment" Mimeo.

Sprenger, C. (2011), "An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points" Mimeo.

Van den Berg, G., J.C. Van Ours and M. Pradhan (2001) "The Declining Price Anomaly in Dutch Dutch Rose Auctions" American Economic Review, 91(4), 1055-1062.

Weber, R. (1983), "Multi-Object Auctions" in (R. Engelbrecht-Wiggans, M. Shubik and R.M. Stark, eds.), Auctions, Bidding and Contracting: Uses and Theory, 165-194, New York: New York University Press.