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Auction Fever: Theory and Experimental Evidence

Karl-Martin Ehrhart (), Marion Ott and Susanne Abele ()
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Karl-Martin Ehrhart: Universitaet Karlsruhe, Postal: RZ Zirkel 2 D-76128 Karlsruhe
Susanne Abele: Miami University, Department of Psychology

No 08-27, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: It is not a secret that certain auction formats yield on average higher prices than others. The phenomenon that dynamic auctions are more likely to elicit higher bids than static one-shot auctions is often associated with the term ''auction fever.'' On a psychological level, we consider the so-called pseudo-endowment effect as largely responsible for peoples’ tendency to submit higher bids, potentially amplified by the source-dependence effect. The phenomenon of auction fever is replicated in an experimental investigation of different auction formats within a private values framework where bidders have private but incomplete knowledge of their valuation for a hypothetical good. We suggest this assumption to be more realistic than definite private values, as assumed in the traditional IPV model. An additional experimental investigation within the traditional IPV framework does not either reveal any indication for the appearance of auction fever. On the basis of our experimental observations we present a model of reference-dependent utility theory that comprehends the phenomenon by assuming that bidders' reference points are shifted by the pseudo-endowment and the source-dependence effect.

Pages: 37 pages
Date: 2008-12-15
New Economics Papers: this item is included in nep-exp and nep-upt
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. We thank Giulio Bottazzi, Clemens Puppe, and Reinhard Selten for helpful comments.
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