The Affiliation Effect in First-Price Auctions

Joris Pinkse and Guofu Tan

Econometrica, 2005, vol. 73, issue 1, 263-277

Abstract: We study the monotonicity of the equilibrium bid with respect to the number of bidders n in affiliated private-value models of first-price sealed-bid auctions and prove the existence of a large class of such models in which the equilibrium bid function is not increasing in n. We moreover decompose the effect of a change in n on the bid level into a competition effect and an affiliation effect. The latter suggests to the winner of the auction that competition is less intense than she had thought before the auction. Since the affiliation effect can occur in both private- and common-value models, a negative relationship between the bid level and n does not allow one to distinguish between the two models and is also not necessarily (only) due to bidders taking account of the winner's curse. Copyright The Econometric Society 2005.

Date: 2005
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