Bidding with Outside Options
Abstract:In this paper we derive equilibrium bidding functions for first-price and second-price auctions with private values when bidders have outside options. We then study bidding behaviour with the help of experiments.
We find that bidders respond to outside options and to variations of common knowledge about competitors' outside options, though bidders in first-price auctions show more overbidding with outside options than without. In second-price auctions overbidding is not affected by outside options. As expected first-price auctions yield more revenue than second-price auctions. This revenue-premium is higher in the presence of outside options.
JEL-Classification: C72, C92, D44
- You can download the SFB Workingpaper 04-21 as a PDF file.
- A more recent version (as of November 2007) can be found here.
- The paper has been published as
- Oliver Kirchkamp, Eva Poen, J. Philipp Reiß (2009), “Outside options: Another reason to choose the first-price auction”, European Economic Review, Vol. 53(2), pp. 153-169.