Auctions with Externalities: An Experimental Study

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

No 2023rwp-214, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We consider a simple auction setting where there are three bidders and one of the bidders creates positive or negative externalities on the other two bidders. We theoretically and experimentally compare two auction formats, the first-price auction (FPA) and the second-price auction (SPA), in our setting. 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 the SPA, and this leads to higher revenues and lower efficiency in the SPA than in the FPA, especially under negative externalities. With incomplete information, we observe similar tendencies, while we obtain no evidence for learning effects.

Keywords: auctions; externalities; experiments; overbidding; efficiency.; auctions; externalities; experiments; overbidding; efficiency. (search for similar items in EconPapers)
JEL-codes: C91 D44 D62 (search for similar items in EconPapers)
Pages: 38pages
Date: 2023-04
New Economics Papers: this item is included in nep-des, nep-exp, nep-gth and nep-reg
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