Essays on almost common value auctions

by 1969- Rose, Susan L.

In a common value auction, the value of the object for sale is the same to all bidders. In an almost common value auction, one bidder, the advantaged bidder, values the object slightly more than the other, regular bidders. With only two bidders, a slight advantage is predicted to have an explosive e¤ect on the outcome and revenue of an auction. The advantaged bidder always wins and revenue decreases dramatically relative to the pure common value auction. Ascending auctions, which reduce to two bidders, are thought to be particularly vulnerable to the explosive e¤ect, which may discourage entry. My dissertation investigates the explosive e¤ect in experimental English clock auctions. The …rst essay, “An Experimental Investigation of the Explosive E¤ect in Almost Common Value Auctions,” uses a two-bidder wallet game to test these predictions. I …nd the e¤ect of an advantage to be proportional, not explosive, con…rming past studies. I develop a behavioral model that predicts the proportional e¤ect and test it against the data. The model has two types of bidders: naïve and sophisticated. Naïve bidders use a rule of thumb bidding function while sophisticated bidders are fully rational and account for the probability that a rival is naïve or sophisticated when best responding. I was able to classify subjects as naïve or sophisticated, and those classi…ed as sophisticated do have a better understanding of the game. However, ii all subjects su¤ered from the winner’s curse, which may have masked the explosive e¤ect and been exacerbated by the structure of the wallet game. The second essay, “Bidding in Almost Common Value Auctions: An Experiment,”moves the analysis to a four bidder auction to directly test the entry predictions. I used a more intuitive common value structure and controlled for the winner’s curse by using subjects with prior experience in common value auctions. I found that although subjects did not su¤er from the winner’s curse, there is no evidence of an explosive e¤ect. Advantaged bidders won no more auctions than predicted by chance. Entry and auction revenue were una¤ected by the presence of advantaged bidders. iii To my parents iv