A Laboratory Comparison of Auctions and Sequential Mechanisms

Abstract:     
When bidders incur a cost to learn their valuations, bidder entry can impact auction performance. Two common selling mechanisms in this environment are an English auction, and a sequential bidding process. Bulow and Klemperer (2009) show, theoretically, that sellers should prefer the auction, because it generates higher expected revenues, while bidders should prefer the sequential mechanism, because it generates higher expected bidder profits. We compare the two mechanisms in a controlled laboratory environment, varying the entry cost, and find that, contrary to the theoretical predictions, average seller revenues tend to be higher under the sequential mechanism, while average bidder profits are approximately the same. We identify three systematic behavioral deviations from the theoretical model: (1) in the auction, bidders do not enter 100% of the time, (2) in the sequential mechanism, bidders do not set pre-emptive bids according to the predicted threshold strategy, and (3) subsequent bidders tend to over-enter in response to pre-emptive bids by first bidders. We develop a model of noisy bidder entry costs that is consistent with these behaviors, and show that our model organizes the experimental data well.

Number of Pages in PDF File: 35

Keywords: : Auctions, Experimental Economics, Behavioral Mechanism Design

working papers series