Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

21 Pages Posted: 30 May 2008

See all articles by Andreas Roider

Andreas Roider

University of Regensburg - Department of Economics and Econometrics; IZA Institute of Labor Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.

Keywords: auction theory, emotions, reserve prices

JEL Classification: D44, D81, D82

Suggested Citation

Roider, Andreas and Schmitz, Patrick W., Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices (September 2007). CEPR Discussion Paper No. DP6476. Available at SSRN: https://ssrn.com/abstract=1138589

Andreas Roider

University of Regensburg - Department of Economics and Econometrics ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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