The Role of Risk Preferences in Pay-to-Bid Auctions

Keywords

penny auction, bid fees, risk-loving preferences

Abstract

We analyze a new auction format in which bidders pay a fee each time they increase the auction price. Bidding fees are the primary source of revenue for the seller but produce the same expected revenue as standard auctions (assuming risk-neutral bidders). If risk-loving preferences are incorporated in the model, expected revenue increases. Our model predicts a particular distribution of ending prices, which we test against observed auction data. The degree of fit depends on how unobserved parameters are chosen; in particular, a slight preference for risk has the biggest impact in explaining auction behavior, suggesting that pay-to-bid auctions are a mild form of gambling.

Original Publication Citation

“The Role of Risk Preferences in Pay-to-Bid Auctions,” by Brennan Platt, Joseph Price, and Henry Tappen. Management Science, 59:2117-2134, September 2013.

Document Type

Peer-Reviewed Article

Publication Date

2013-9

Permanent URL

http://hdl.lib.byu.edu/1877/8518

Publisher

Management Science

Language

English

College

Family, Home, and Social Sciences

Department

Economics

University Standing at Time of Publication

Full Professor

Link to Full Text

Share

COinS