English Auctions with Toeholds: An Experimental Study

25 Pages Posted: 19 Oct 2008  

Sotiris Georganas

University of London - Royal Holloway College

Rosemarie Nagel

Universitat Pompeu Fabra - Department of Economics

Date Written: July 8, 2008

Abstract

We run experiments on English Auctions where the bidders already own a part (toehold) of the good for sale. The theory predicts a very strong effect of even small toeholds, however we find the effects are not so strong in the lab. We explain this by analyzing the flatness of the payoff functions, which leads to relatively costless deviations from the equilibrium strategies. We find that a levels of reasoning model explains the results better than the Nash equilibrium. Moreover, we find that although big toeholds can be effective, the cost to acquire them might be higher than the strategic benefit they bring. Finally our results show that in general the seller's revenues fall when the playing field is uneven.

Keywords: Experiments, toehold auction, takeover, payoff, flatness, quantal response, level-k

JEL Classification: D44, C91, G34

Suggested Citation

Georganas, Sotiris and Nagel, Rosemarie, English Auctions with Toeholds: An Experimental Study (July 8, 2008). Available at SSRN: https://ssrn.com/abstract=1280789 or http://dx.doi.org/10.2139/ssrn.1280789

Sotiris Georganas

University of London - Royal Holloway College ( email )

Senate House
Malet Street
London, TW20 0EX
United Kingdom

Rosemarie Nagel (Contact Author)

Universitat Pompeu Fabra - Department of Economics ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain
+34 93 542 3729 (Phone)
+34 93 542 1746 (Fax)

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