Opportunity Cost, Inattention and the Bidder's Curse

58 Pages Posted: 11 Feb 2017 Last revised: 20 Jul 2020

See all articles by David Freeman

David Freeman

Simon Fraser University (SFU)

Erik O. Kimbrough

Chapman University - The George L. Argyros School of Business & Economics

J. Philipp Reiss

Karlsruhe Institute of Technology

Date Written: July 10, 2020

Abstract

Auction winners sometimes suffer a "bidder's curse", paying more for an item at auction than the fixed price charged for an identical item by other sellers. This seemingly irrational behavior is puzzling because the information necessary to avoid overpaying would appear to be readily available to bidders, yet they seem to ignore it. To understand this behavior, we consider the bidders' decisions whether to acquire information about the fixed price before bidding, in the presence of opportunity costs. Our theory introduces costly information acquisition into an auction model, with a fixed price aftermarket selling an identical good. When information about the fixed price is costly, bidders sometimes remain rationally ignorant and overbid in the auction, generating the bidder's curse. To assess the empirical validity of our proposed explanation, we study the model's predictions in an experiment where subjects have an opportunity cost of looking up a fixed price and bid in an auction. We find that information acquisition decreases and overbidding increases with opportunity cost as predicted. Most observed lookup behavior is rationalizable and rational ignorance reliably generates the bidder's curse.

Keywords: Auctions, Bidder's Curse, Limited Attention, Experiments, Rational Ignorance

JEL Classification: C72, C92, D44

Suggested Citation

Freeman, David and Kimbrough, Erik O. and Reiss, J. Philipp, Opportunity Cost, Inattention and the Bidder's Curse (July 10, 2020). European Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2915309 or http://dx.doi.org/10.2139/ssrn.2915309

David Freeman

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Erik O. Kimbrough (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Dr
Orange, CA 92866
United States

J. Philipp Reiss

Karlsruhe Institute of Technology ( email )

Kaiserstra├če 12
Karlsruhe, Baden W├╝rttemberg 76131
Germany

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