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

Author(s):

Benjamin Balzer, Antonio Rosato, Jonas von Wangenheim

Date of publication: June 2020

Working paper number: 05

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 equiv- alence 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.

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Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.