First In, Last Out

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Science  25 Mar 2005:
Vol. 307, Issue 5717, pp. 1843
DOI: 10.1126/science.307.5717.1843c

In a first-price auction, players submit sealed bids for a known item, which is then sold to the highest bidder at the price of that bid. In a seller's English clock auction, the initial price is high and decreases at a steady rate; players choose not to buy by exiting, and the auction ends when the item is sold to the last player at the price at which the penultimate player exited.

Berg et al. have modified these two types of auction protocols to explore risk-phobic and risk-philic behavior of subjects. In their version of the first-price auction, the winning bidder is then awarded a monetary sum equal to the difference between the resale price of the item and their bid (generally less than the resale price); for the English clock auction, the last player receives a sum equal to the sale price, whereas the other players receive the same sum but only with a known, non-zero probability (i.e., in some cases they would receive nothing). The authors find that subjects in the first-price auction do not risk making low bids in the hope of gaining a larger payoff and do, in fact, place their bids somewhere between the risk-neutral threshold and the actual resale price. However, in the English clock auction, subjects are more apt to play the gamble, so that they exit the auction earlier than expected value would predict. — GJC

Proc. Natl. Acad. Sci. U.S.A. 102, 4209 (2005).

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