Auctions: Experiments

Experiments permit rigorous testing of auction theory. In single-unit private value auctions the Revenue Equivalence Theorem fails, but the comparative static predictions of Nash bidding theory hold, indicating that bidders are responsive to the primary economic forces at work in the theory. In single-unit common value auctions inexperienced bidders invariably suffer from a “winner’s curse,” and the comparative static predictions of the Nash bidding model fail. More experienced bidders do substantially better. Recent research dealing with Internet auctions, mixed private and common value auctions, and multi-unit demand auctions are surveyed as well. Auctions: Experiments: Experimental work in auctions interacts with theory, providing a basis for testing and modifying theoretical developments. It has advantages and disadvantages relative to empirical work with field data, so that we view the two as complimentary. Experimental work is used increasingly as a test-bed for new auction formats such as the Federal Communication Commission’s (FCC) sale of spectrum (airwave) rights. Until recently most of theoretical and experimental work was devoted to singleunit demand auctions. With the success of the FCC’s spectrum auctions much of the interest has shifted to auctions in which individual bidders demand multiple units. Experimental work in this area is still in its infancy. In keeping with the historical development of the field we first report on single-unit demand auctions and then move to multi-unit demand auctions and Internet auctions. Single-unit, private-value auctions: Initial experimental research on auctions focused on the independent private values (IPV) model investigating the Revenue Equivalence Theorem. In the IPV model each bidder knows his valuation of the item with certainty, bidders' valuations are drawn independently from each other, and bidders know the distribution from which their rivals' values are drawn (but not their values) and the number of bidders. Under the revenue equivalence theorem the four main auction formats – firstand second-price sealed-bid auctions, English and Dutch auctions – yield the same average revenue for risk neutral bidders. Further, the first-price sealed-bid and Dutch auctions are theoretically isomorphic – they yield the same revenue for each auction trial regardless of risk preferences – with the second-price sealed-bid and English clock auction isomorphic to 1 The Dutch auction starts with a high price which is lowered until a bidder accepts at that price. In English auctions price starts low and increases until only one bidder is left standing and pays the price where the next to last bidder dropped out. In a first(second-) price sealed-bid auction the high bidder wins the item and pays the highest (second-highest) bid.