Discussion paper

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

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.

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Citation

Schmitz, P and A Roider (2007), ‘DP6476 Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices‘, CEPR Discussion Paper No. 6476. CEPR Press, Paris & London. https://cepr.org/publications/dp6476