Abstract

Economic experiments on first-price sealed bid auctions have consistently demonstrated overbidding relative to ascending auction formats and the risk-neutral Nash equilibrium.  Lucking-Reiley (1999), however, finds that in online auctions for Magic cards, first-price auctions violate revenue equivalence by underperforming other auction formats.  Further, the prevalence of ascending formats used by online auction sites, given revenue-maximizing sellers, is difficult to reconcile with the laboratory findings on auctions.  Laboratory experiments typically assign subjects a private value for an imaginary good.  We explore the role of these assigned values in our understanding of behavior in first-price sealed bid auctions.  We conduct an experiment in which participants bid for a real object based on internally-generated private values and solicit subjects’ pleasures at various prices for the object.  When bidding for an Amazon.com gift certificate, we find that subjects underbid in a first-price auction format.  The results are consistent with field studies of online auctions as well as psychological studies of excessive optimism and loss aversion.