Asymmetric auctions with resale: an experimental study Sotiris Georganas, Ohio State and U of London, Royal Holloway John Kagel, Ohio State 2009 Econometric Society, NASM

Motivation Auctions are often followed by resale Resale can arise due to many reasons When bidders are symmetric New bidders arriving in resale stage (Haile 1999) Outcome of initial auction is inefficient because of Noisy signals (Haile 2003) Noisy behavior (Georganas 2008) When bidders are asymmetric Speculation equilibria Zero value speculators in second price auctions (Garratt, Troeger 2006) Bidders with positive values also speculate (Hafalir and Krishna, 2008)

Digression: symmetric auctions with resale, Georganas (2008) Simple english auction with full information in second stage Bid your value equilibrium in first stage But equilibrium not robust Human players make mistakes and anticipate others to make mistakes Expecting a small amount of noise added to the equilibrium bids leads away from bif your value to a very different best response Why? BR naive assumes normal error with SD=15 Next page bigger graph of the problem (took image away)

Digression: symmetric auctions with resale, expected payoffs Say what is the error distribution, robustness of results Explain that this feature can be incorporated in some formal models of bounded rationality

Bounded rationality

Asymmetric auction model 2 risk neutral bidders, s and w, compete in a first price auction for one unit of an indivisible good Strong type has use value vi ~U[0, as] Weak type has use value vi ~U[0, aw], with 0< aw< as Resale stage where winner makes a take it or leave it offer Equilibrium (Hafalir and Krishna 2008): Next slide showing the bids

Equilibrium Bids aw = 10, as = 100 The effect of resale is very strong Maximum bid with resale: ca. 27 Without: ca. 9 (intuition? Weak bids never more than value, strong never more than highest weak) Symmetrization! Brief explanation: if symmetric you cannot try to resell (if you win you have a higher value than other!) Without resale, low never bids more than value, high does not want to bid more than highest low

Equilibrium Bids 2 aw = 34, as = 100 The effect of resale is not as strong Maximum bid with resale: ca. 34 Without: ca. 25 Bid your value for weak type Symmetrization still holds 8

Symmetrization

Experimental Design Experiments at Ohio State, computerized (zTree), about 16 subjects at each session 3 treatments: aw =10 (3 sessions), aw =34 (3 sessions) and aw =34 with dual markets (2 session) 2 trial periods, 40 paying periods, random matching Players alternate roles after 20 periods 1.5 hours Mean payoffs about 36 dollars Exchange rate 1/17 in W10 and 1/15 in W34 Two bankruptcies (got 7 dollars and went home)

Results: Prices over time There is learning over time Shock in period 20

Results contd. Use data from periods 10-20 and 30-40 where learning has stabilized Even in these later periods, prices are higher than predicted Treatment Mean actual price Mean predicted price 10 19.98 18.75 34 25.98 21.37 Note that if there was no resale revenue in 10 would be less than 10 Let us see why by examining individual bids

Bids, treatment 10

Bids, treatment 10 Quartiles Whisker extends to smallest outlier inside 1.5 times IQR Solid line is bid your value, dashed equilibrium

Reasons for deviation in treatment 10 High types make high profits Low types have very low profits in equilibrium and even lower in practice Why? Did they win often enough? Did they set good reserve prices conditional on winning? 15

Frequency of winning Win frequency 10 34 Actual 0.2564 0.3701 Won less often because of high types overbidding Does not go away with time Win frequency 10 34 Actual 0.2564 0.3701 Predicted given values (in theory= 0.5) 0.4987 0.4643

Reserve prices strong types bidding above the RNNE (even by a modest amount) substantially reduces weak players opportunities to earn positive profits. This, in conjunction with the low predicted profits to begin with, pushes weak players’ profits over the edge to earning small negative profits. Optimal reserve depends on the winning price and opponent’s strategy Reserve prices were set quite well Should not be the reason for underbidding

What can explain the deviation? Strong types overbid in first stage This makes it harder for weak types to win and lowers value of winning Strong opponents I win against have lower average values -> resale option less attractive Lower profits than in equilibrium Risk aversion? Problems can be avoided if predicted strategy for weak less risky -> treatment W34 Sotiris Georganas - Auctions with Resale

Bids, treatment 34

Bids, treatment 34

Dual Market aw =34, subjects submit bids for resale & no resale case

Symmetrization? Econometrician could look at third panel and think bids come from symmetric bidders! Significant change from no resale to resale; Kolm.-Smirnov p<0.01

Comparison with previous results Gueth et al 2005, asymmetric auctions without resale Bids higher than theory, less than truthful Georganas 2004, symmetric English auctions Overbidding Resale sometimes raises revenues even if theory predicts it shouldn’t Lange, List, Price symmetric first price auctions Also find some overbidding and attribute it to risk aversion

Conclusions Resale has an effect in asymmetric auctions Raises revenues Symmetrizes bids to some degree Deviation from theory depends on asymmetries Both types Underbidding for big asymmetries Equilibrium bidding in some intermediate range Overbidding for low asymmetries Risk aversion about the uncertain profits in second stage might be an explanation We know in symmetric first price sealed bids they overbid…

Dual Market: no resale

Summary of single market treatments

Summary 34 dual Sotiris Georganas - Auctions with Resale

Over/under-bidding in 10

Over/under-bidding in 34

Treatment 10, bids Sotiris Georganas - Auctions with Resale