Should Sellers Prefer Auctions? A Laboratory Comparison of Auctions and Sequential Mechanisms

Andrew M. Davis (), Elena Katok () and Anthony M. Kwasnica ()
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Andrew M. Davis: Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
Anthony M. Kwasnica: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802

Management Science, 2014, vol. 60, issue 4, 990-1008

Abstract: When bidders incur a cost to learn their valuations, bidder entry can impact auction performance. Two common selling mechanisms in this environment are an English auction and a sequential bidding process. Theoretically, sellers should prefer the auction, because it generates higher expected revenues, whereas bidders should prefer the sequential mechanism, because it generates higher expected bidder profits. We compare the two mechanisms in a controlled laboratory environment, varying the entry cost, and find that, contrary to the theoretical predictions, average seller revenues tend to be higher under the sequential mechanism, whereas average bidder profits are approximately the same. We identify three systematic behavioral deviations from the theoretical model: (1) in the auction, bidders do not enter 100% of the time; (2) in the sequential mechanism, bidders do not set preemptive bids according to the predicted threshold strategy; and (3) subsequent bidders tend to overenter in response to preemptive bids by first bidders. We develop a model of noisy bidder-entry costs that is consistent with these behaviors, and we show that our model organizes the experimental data well.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1800. This paper was accepted by Teck Ho, behavioral economics.

Keywords: behavioral operations management; auctions; experimental economics; behavioral mechanism design (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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