Fear of Losing in Dynamic Auctions: An Experimental Study

Peter Cramton, University of Maryland
Emel Filiz-Ozbay, University of Maryland
Erkut Ozbay, University of Maryland
Pacharasut Sujarittanonta, University of Maryland

Abstract

We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. This pricing difference creates stronger incentives for bid shading under LAB. When bidders seek to maximize profits, the HRB auction maximizes revenues and is fully efficient. The bid shading under LAB means that a bidder may regret losing. Bidders that anticipate this regret may limit bid shading, causing the LAB auction to achieve higher revenues than the HRB auction. Our experiments confirm that this is the case. The LAB auction achieves higher revenues. This also is the case in a version of the clock auction with provisional winners that is commonly used in spectrum auctions. This revenue result may explain the frequent use of LAB pricing despite the efficiency and simplicity advantages of HRB pricing.