Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices*.(Report) Roider, Andreas; Schmitz, Patrick W

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Roider, Andreas ; Schmitz, Patrick W
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Scandinavian Journal of Economics
Auctions - Mathematical models.; Valuation -- Analysis; Auctions -- Analysis
To purchase or authenticate to the full-text of this article, please visit this link: Byline: Andreas Roider(1), Patrick W. Schmitz(2) Keywords: Auction theory; emotions; reserve prices Abstract The experimental literature has documented that there is overbidding in second-price auctions, regardless of the valuations of bidders. 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 rationalized by a simple extension of the standard auction model, where bidders anticipate (constant) positive or negative emotions caused by the mere fact of winning or losing. Even if the emotional (dis-)utilities are very small, the revenue-maximizing reserve price might be significantly different from the standard model. Moreover, decreases with the number of bidders. Author Affiliation: (1)University of Regensburg, DE-93053 Regensburg, Germany (2)University of Cologne, DE-50923 Cologne, Germany Correspondence: (*) We would like to thank Stephanie Rosenkranz for helpful discussions, and we are very grateful to the anonymous referees for making valuable comments and suggestions. First version submitted June 2009;, final version received February 2011.
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