Knowing Your Opponent: An Experiment on Auction Design with Asymmetries

Economists, when faced with undesirable bidder behavior in an auction, have often studied how changing the auction format can be beneficial. We study instead how changing the information available to bidders can change bidder behavior and increase the revenue an auction generates. We study common-value second-price auctions where bidders differ in the precision of their information (i.e., are experts or non-experts) and compare two auction designs, Disclosure and Non-Disclosure, in which bidders are told if their opponents are experts or not, providing a test of the effectiveness of information design in auctions. Theory predicts that bidders should decrease their bids when facing an expert and that non-disclosure should generate higher revenue. Despite the presence of the winner’s curse, we find experimental evidence that nondisclosure does generate higher revenue and achieves roughly 50% of the theoretical gains. Looking at individual bidding behavior, the higher revenue generated by nondisclosure appears to be due bidder behavior similar to that of the theory. Additionally, we derive a measure of sophistication and find that it predicts bidding behavior closer to theoretical predictions.