Dutch vs. first-price auctions with expectations-based loss-averse bidders

Benjamin Balzer, Antonio Rosato and Jonas von Wangenheim

Journal of Economic Theory, 2022, vol. 205, issue C

Abstract: We study Dutch and first-price auctions with expectations-based loss-averse bidders and show that the strategic equivalence between these formats no longer holds. Intuitively, as the Dutch auction unfolds, a bidder becomes more optimistic about her chances of winning; this stronger “attachment” effect pushes her to bid more aggressively than in the first-price auction. Thus, Dutch auctions raise more revenue than first-price ones. Indeed, the Dutch auction raises the most revenue among standard auction formats. Our results imply that dynamic mechanisms that make bidders more optimistic raise more revenue, thereby rationalizing the use of descending-price mechanisms by sellers in the field.

Keywords: Loss aversion; Dutch auctions; Revenue equivalence; Personal equilibrium (search for similar items in EconPapers)
JEL-codes: D44 D81 D82 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Dutch vs. First-Price Auctions With Expectations-Based Loss-Averse Bidders (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:205:y:2022:i:c:s0022053122001351

DOI: 10.1016/j.jet.2022.105545

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