The Role of Risk Preferences in Pay-to-Bid Auctions
penny auction, bid fees, risk-loving preferences
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.
BYU ScholarsArchive Citation
Platt, Brennan C.; Price, Joseph; and Tappen, Henry, "The Role of Risk Preferences in Pay-to-Bid Auctions" (2013). Faculty Publications. 5788.
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