Credibility in Second-Price Auctions: An Experimental Test

TL;DR

This paper experimentally examines how the credibility of second-price auctions influences bidding behavior and outcomes, revealing deviations from theoretical predictions due to sellers' aversion to rule-breaking.

Contribution

It provides the first experimental evidence on the impact of auction credibility, showing that non-credible second-price auctions do not behave as theory predicts.

Findings

Non-credible second-price auctions do not converge to first-price auctions.

Sellers' aversion to rule-breaking explains deviations from theoretical outcomes.

Experimental confirmation of behavioral explanations for auction dynamics.

Abstract

We provide the first direct test of how the credibility of an auction format affects bidding behavior and final outcomes. To do so, we conduct a series of laboratory experiments where the role of the seller is played by a human subject who receives the revenue from the auction and who (depending on the treatment) has agency to determine the outcome of the auction. Contrary to theoretical predictions, we find that the non-credible second-price auction fails to converge to the first-price auction. We provide a behavioral explanation for our results based on sellers' aversion to rule-breaking, which is confirmed by an additional experiment.