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Heterogeneous bids in auctions with rational and markdown bidders-Theory and Experiment

Oliver Kirchkamp and J. Philipp Reiß

We present results from a series of experiments that allow us to measure overbidding and, in particular, underbidding in first-price auctions. We investigate how the amount of underbidding depends on seemingly innocent parameters of the experimental setup.

To structure our data we present and test a theory of constant markdown bids. While a fraction of bidders can be well described by Bayesian Nash equilibrium bids, a larger fraction seems to either use constant markdown bids or seems to rationally optimise against a population where some members use markdown bids and some are rational.

JEL-Classification: C92, D44

Keywords: Auction, Experiment, Overbidding, Underbidding, Risk-Aversion.


An earlier version of this paper has been circulated under the title “The overbidding-myth and the underbidding-bias in first-price auctions”. This paper is available as SFB 504 Working Paper 04-32 as a PDF file.
A more recent version (as of August 2008) can be found here.