DP6476 Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

Author(s): Andreas Roider, Patrick W. Schmitz
Publication Date: September 2007
Keyword(s): auction theory, emotions, reserve prices
JEL(s): D44, D81, D82
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6476

The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.