Sequential Auctions, Price Trends, and Risk Preferences

Tinbergen Institute Discussion Paper 14-139/I

34 Pages Posted: 21 Oct 2014

See all articles by Audrey Hu

Audrey Hu

University of Amsterdam - Faculty of Economics and Business (FEB)

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: October 15, 2014

Abstract

We analyze sequential Dutch and Vickrey auctions where risk averse, or risk preferring, bidders may have heterogeneous risk exposures. We derive and characterize a pure strategy equilibrium of both auctions for arbitrary number of identical objects. A sufficient, and to certain extent necessary, condition for this result is that bidders' marginal utilities are log-submodular in income and type. We then show that when bidders are risk averse (preferring), the equilibrium price sequences should be downward (upward) drifting, and in each period the conditional expected revenue is higher (lower) in the Dutch than in the Vickrey sequential auctions. In particular, the "declining price anomaly" is perfectly consistent with nonincreasing absolute risk aversion when bidders have exposures to background risk.

Keywords: sequential auction, background risk, risk preferences, declining prices, log-submodularity

JEL Classification: D44, D82

Suggested Citation

Hu, Audrey and Zou, Liang, Sequential Auctions, Price Trends, and Risk Preferences (October 15, 2014). Tinbergen Institute Discussion Paper 14-139/I, Available at SSRN: https://ssrn.com/abstract=2512150 or http://dx.doi.org/10.2139/ssrn.2512150

Audrey Hu (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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