First-Price and Second-Price Auctions with Externalities: An Experimental Study

Sang-Hyun Kim, Chulyoung Kim, Jaeok Park and Jinhyuk Lee
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Chulyoung Kim: Yonsei University
Jaeok Park: Yonsei University
Jinhyuk Lee: Korea University

No 2022rwp-199, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We consider a scenario where a single indivisible object is auctioned off to three bidders and among the three bidders there is one bidder whose winning imposes a positive or negative externality on the other two bidders. We theoretically and experimentally compare two standard sealed-bid auction formats, first-price and second-price auctions, under complete information. Using a refinement of undominated Nash equilibria, we analyze equilibrium bids and outcomes in the two auction formats. Our experimental results show that overbidding relative to equilibrium bids is prevalent, especially in second-price auctions, and this leads to higher revenue and lower efficiency in secondprice auctions than in first-price auctions, especially under negative externalities. Our results are consistent with previous experimental findings that bidders tend to overbid more in second-price auctions than in first-price auctions, and they suggest that such a tendency is robust to the introduction of externalities.

Keywords: auctions; externalities; experiments; overbidding; efficiency. (search for similar items in EconPapers)
JEL-codes: C91 D44 D62 (search for similar items in EconPapers)
Pages: 39pages
Date: 2022-08
New Economics Papers: this item is included in nep-des, nep-exp and nep-gth
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