Abstract not found

We experimentally investigate the effect of social identification and information feedback on individual behavior in contests. In contrast to standard theoretical predictions, we find significant over-expenditure of efforts in all treatments. Identifying subjects through photo display decreases efforts. We develop a behavioral model based on social identity explaining how a decrease in ‘social distance’ between group members through photo display promotes prosocial behavior. Providing information feedback about others’ effort does not affect the aggregate effort levels but changes the dynamics of individual behavior by facilitating greater adherence to the ‘group norm.’ Finally, we find that significant over-expenditure can be explained by a combination of non-monetary utility of winning and relative payoff maximization.

We study a procurement setting in which the buyer seeks a low price but will not allocate the contract to a supplier who has not passed qualification screening. Qualification screening is costly for the buyer, involving product tests, site visits, and interviews. In addition to a qualified incumbent supplier, the buyer has an entrant of unknown qualification. The buyer wishes to run a price-only, open-descending reverse auction between the incumbent and the entrant, and faces a strategic choice about whether to perform qualification screening on the entrant before or after the auction. We analytically study the buyer’s optimal strategy, accounting for the fact that under post-auction qualification the incumbent knows he could lose the auction but still win the contract. In our analysis we derive the incumbent’s optimal bidding strategy under post-auction qualification and find that it follows a threshold structure in which high-cost incumbents hold back on bidding — or even boycott the auction — in order to preserve their profit margin, and only lower-cost incumbents bid to win. These results are strikingly different from the usual opendescending auction analysis where all bidders are fully qualified and bidding to win is always a dominant strategy. We test our analytical results in the laboratory, with human subjects. We find that qualitatively our theoretical predictions hold up quite well, although incumbent suppliers bid somewhat more aggressively than the theory predicts, making buyers more inclined to use post-auction qualification.

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Penny auction is an innovative, popular online auction format in which bidders are charged a small fee for placing each bid. A penny auction typically ends up with an extremely low final auction price, such that only one winning bidder can derive positive consumer surplus whereas other bidders lose out from the bidding costs. This makes it challenging to retain bidders who rarely win. Using a field experiment, we empirically evaluate how novel auction rules can improve overall consumer retention and long-term bidding participations. Specifically, we implemented three restrictions on bidding activities of customers. Our results show these restrictions enhance the overall number of bids by 50%. The intuition is to restrict the winning probability of a small group of bidders who won most of the auctions so that more bidders can enjoy the thrill and fun of winning an auction, inducing them to bid more in the long run.

Apopular procurement auction format is one in which bidders compete during a live auction event butobserve only the rank of their own bid and not the price bids of their competitors. We investigate the performance of auctions with rank feedback in a simple setting for which analytical benchmarks are readily available. We test these benchmarks in the laboratory by comparing the performance of auctions with rank-based feedback to auctions with full-price feedback as well as to auctions with no price feedback (sealed-bid auctions). When bidders are risk-neutral expected-profit maximizers, the buyer’s expected costs should be the same under rank and full-price feedback; moreover, expected buyer costs should be the same as in a sealed-bid auction. However, when we test this theoretical equality in a controlled laboratory setting we find that, consistent with practitioners ’ beliefs but contrary to our model, rank feedback results in lower average prices than full-price feedback. We identify two behavioral reasons for the difference. The first explanation is based on the similarity of the bidders ’ problem in a sealed-bid first-price auction and an open-bid auction with rank feedback. The second explanation incorporates the use of jump bids motivated by bidder impatience.

We investigate both theoretically and experimentally the role that information disclosure has on behavior in all pay environments in which all agents must exert costly effort, but only the winner is rewarded. Through the lens of all pay auctions, we show that bidders who have regret concerns when they lose an auction may alter their bids. Whether or not information about the winning bid is disclosed, all losing bidders regret not bidding 0. However, when feedback on the winning bid is provided, those bidders who lost at an affordable price may regret not bidding more. We show that the former effect causes bidders to lower their bids, while the latter effect causes bidders to raise their bids. Our experimental results indicate overbidding whether or not the winning bid is disclosed to losing bidders. However, disclosing the winning bid leads to even more aggressive bidding, increases revenues, decreases the frequency of dropouts and also leads to more efficient allocations. Thus our results show that information disclosure is a powerful tool that mechanism designers may wish to exploit to extract more rents in all pay environments.

Abstract Controlled laboratory experiments give researchers a great deal of control in making them useful for testing analytical models. In this tutorial I introduce laboratory experiments and discuss methodological issues in designing and conducting laboratory experiments.

Abstract not found

A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher's thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision.