Abstract

"Naive Bidding"

George Deltas and Richard Engelbrecht-Wiggans

First Author :

George Deltas
Economics
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

deltas@uiuc.edu

http://www.staff.uiuc.edu/~deltas/

Second Author :

Richard Engelbrecht-Wiggans
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

eplus17@uiuc.edu

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Abstract :

This paper presents an equilibrium explanation for the persistence of naļve bidding. Specifically, we consider a common value auction in which a “naļve” bidder (who ignores the Winner’s Curse) competes against a fully rational bidder (who understands that her rival is not). We show that the naļve bidder earns higher equilibrium profits than the rational bidder when the signal distribution is symmetric and unimodal. We then consider a sequence of such auctions with randomly selected participants from a population of naļve and rational bidders, with the proportion of bidder types in the population evolving in response to their relative payoffs in the auctions. We show that the evolutionary equilibrium contains a strictly positive proportion of naļve bidders. Finally, we consider more general examples. In these examples (i) a naļve bidder matched against a rational bidder does worse than his rational opponent but (ii) a naļve bidder matched against a rational bidder does better than a rational bidder matched against another rational bidder. Again, the evolutionary equilibrium contains a strictly positive proportion of naļve bidders

Manuscript Received : 2000

Manuscript Published : 2000

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