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Nonlinear Behavior in Sealed Bid First Price Auctions

Chen, Kat-Yut and Plott, Charles R. (1995) Nonlinear Behavior in Sealed Bid First Price Auctions. Social Science Working Paper, 774. California Institute of Technology , Pasadena, CA.

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The extent to which the behavior of people is consistent with game theoretic principles is investigated in a first price sealed bid auction environment Three linear rules of thumb with increasing complexity are used as benchmarks to gauge the accuracy of the Constant Relative Risk Aversion Model (CRRAM). In addition, the CRRAM is tested against the relaxation of the rational expectation hypothesis. Existing competitive bidding experiments cannot clearly distinguish between game theoretic models and linear markdown rules on an individual level. Within the parametric environments studied and reported in the experimental literature, game theoretic solutions are linear over the range of private values in which bid functions are estimated. In this study, agents drew values from non-uniform distributions. As a result, the game theoretic bidding behavior is nonlinear. Due to the nonlinearity, special econometric and numerical techniques are applied to solve the model and obtain the estimates. The CRRAM exhibits good fit of the data. The pseudo R2 is greater than 0.8 in 90 percent of the subjects. The CRRAM is more accurate than the Markdown Model (MM) and the Simple Ad hoc Model (SIMAM) but not as accurate as the Sophisticated Ad hoc Model (SOP AM). The data also supports the relaxation of the rational expectation hypothesis and suggests that substantial increases in the predictive power of game theoretic models can be gained from improvements in the theory of belief formation.

Item Type:Report or Paper (Working Paper)
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Additional Information:Revised version. The financial support of the National Science Foundation and the Caltech Laboratory for Experimental Economics and Political Science is gratefully acknowledged. We also wish to thank John Ledyard. Mahmoud El-Gamal, John Kagel. Dan Levin, and James Walker for many helpful suggestions. The authors are indebted to Caltech student Ralph Wolf who conducted initial experimentation with first price auctions under non-uniform distributions. The authors are also indebted to Kemal Guler whose analysis of the Wolf data had a substantial impact on the research reported here. Published as Chen, Kay-Yut, and Charles R. Plott. "Nonlinear behavior in sealed bid first price auctions." Games and Economic Behavior 25, no. 1 (1998): 34-78.
Group:Social Science Working Papers
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Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:774
Classification Code:JEL: C72; C91; C92; D44
Record Number:CaltechAUTHORS:20170830-142425505
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80982
Deposited By: Jacquelyn Bussone
Deposited On:30 Aug 2017 21:36
Last Modified:03 Oct 2019 18:37

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