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Dutch versus First-Price Auctions with Dynamic Expectations-Based Reference-Dependent Preferences

Benjamin Balzer (), Antonio Rosato and Jonas von Wangenheim ()
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Benjamin Balzer: University of Technology Sydney
Jonas von Wangenheim: University of Bonn, Germany

No 2020/05, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: We study the behavior of expectations-based loss-averse bidders in Dutch and first-price auctions with independent private values. With loss-averse preferences, 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, we show that the Dutch auction raises the most revenue among standard auction formats. Our results imply that with expectations- based reference-dependent preferences sequential mechanisms might outperform static ones.

Keywords: Reference-Dependent Preferences; 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)
Pages: 19 pages
Date: 2020-06-01
New Economics Papers: this item is included in nep-des, nep-mic and nep-upt
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