A non-expected utility model and its application in practical auctions

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)2931–2944
Journal / PublicationApplied Economics
Volume52
Issue number27
Online published8 Dec 2019
Publication statusPublished - 2020

Abstract

This article presents a non-expected utility decision model which is nonlinear in the winning probabilities. The model not only explicitly expresses bidders’ attitudes to risk, but also addresses their preference over the bidding criteria. To demonstrate how to apply the model in the practical auction design, the first- and second-price auctions with both commission rate and reserve price are examined, respectively. For nonrisk-neutral bidders, the equilibrium bidding strategies are characterized, in which the commission rate has a significant influence on the bidding strategy through the critical valuation. However, the existence of the optimal commission rate is uncertain, but once it exists, it depends on the information rent of the highest or second highest order valuation in terms of the inverse hazard rate. With risk-aversion bidders, the only difference to the optimal reserve price is a constant between the first- and second-price auctions. The revenue comparisons show that the classical Revenue Equivalence Theorem fails in practical auctions with the commission rate. This article extends the application of the decision-making model in the auction design in theory and provides some guidance for the auction house and the seller to make their decisions in reality.

Research Area(s)

  • Bidding strategy, commission rate, non-expected utility, reserve price, revenue comparison

Citation Format(s)

A non-expected utility model and its application in practical auctions. / Wang, Mingxi; Hu, Yi; Dang, Chuangyin; Wang, Shouyang.

In: Applied Economics, Vol. 52, No. 27, 2020, p. 2931–2944.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review