First Price Sealed-Bid Auctions with Bidders’ Heterogeneous Risk Behavior: An Adversarial Risk Analysis Approach

Muhammad Ejaz (), Nisho Rani () and Muhammad Ramzan Sheikh ()
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Muhammad Ejaz: Department of Statistics, Bahauddin Zakariya University, Multan, Punjab 60000, Pakistan
Nisho Rani: Department of Statistics, Bahauddin Zakariya University, Multan, Punjab 60000, Pakistan
Muhammad Ramzan Sheikh: School of Economics, Bahauddin Zakariya University, Multan, Punjab 60000, Pakistan

Decision Analysis, 2023, vol. 20, issue 3, 231-241

Abstract: Bidders’ bidding behavior is analyzed in first price sealed-bid (FPSB) auctions using an adversarial risk analysis (ARA) framework. However, using nonstrategic play and level- k thinking solution concepts, modeling is performed by assuming only two bidders. Also, the aleatory and concept uncertainties have not been yet taken into account by using an ARA framework for these auctions. In this paper, we apply an ARA approach to model bidders’ bidding behavior in a more realistic way for FPSB auctions. We assume n bidders that may have different wealth and heterogeneous risk behaviors. We use nonstrategic play and level- k thinking solution concepts, and we take into account aleatory uncertainty in addition to epistemic uncertainty. Finally, concept uncertainty is taken into account to find ARA solutions for these auctions. We also provide numerical examples to illustrate our methodology.

Keywords: aleatory uncertainty; concept uncertainty; adversarial risk analysis; Bayesian game theory; decision theory (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ordeca:v:20:y:2023:i:3:p:231-241

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