Simple Design Mechanisms to Mitigate the Winner's Curse: Simultaneous Online Auctions with Rotating Bids
University of Minnesota - Twin Cities - Carlson School of Management
Paul A. Pavlou
Temple University - Department of Management Information Systems; Temple University - Department of Strategic Management
May 3, 2010
Bidders frequently overpay in auctions, a phenomenon termed the “Winner’s Curse.” Vickrey’s second-price auctions only lessen the winner’s curse; they do not eliminate it. Overpayment is partly due to an endowment effect; bidders develop a sense of psychological ownership toward a product, which is legitimized by the effort they expend during the auction. Perceived ownership increases their product valuation and causes the winner’s curse. Therefore, we introduce two design mechanisms – rotating bids (participants take turns in bidding, thus reducing their effort) and simultaneous auctions (participants are presented with multiple auctions simultaneously, thus reducing any anxiety over their potential failure to win) – which are proposed to attenuate the effect of participation costs on product valuation. We experimentally test the proposed mechanisms, demonstrating the role of rotating bids in moderating the effect of effort on product valuation. Implications for increasing bidder welfare by mitigating the winner’s curse with appropriate auction designs are discussed.
Keywords: Auction Design, Social Welfare, Participation Cost, Endowment Effect, Vickrey Auctions, Design Science
Date posted: March 27, 2010 ; Last revised: April 22, 2014