Likelihood of Winning and Overbidding in First-Price Auctions

 

Paolo Crosetto, Antonio Filippin and Peter Katuščák

 


Abstract

We study bidding in first-price sealed-bid auctions with independent private values. We use a one-shot experiment in which a single human bidder bids against a single computerized bidder whose bids are drawn from a uniform distribution. Across our two main treatments, the value of the human bidders is fixed, while we change the upper boundary of the set of computerized bids. We find that humans' bids are higher when the boundary of the opponent is also higher. Such evidence is inconsistent with bidding based on objective functions that are linear in the probability of winning given one's bid. This is the case of expected utility, anticipated regret, and utility of winning that is affine in value. According to such theories, rescaling the probability of winning should not affect the optimal choice. This finding suggests that an alternative theory of decision-making, such as prospect theory, is necessary to account for bidding in first-price auctions in general.

Keywords: auctions, bidding, overbidding.


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