An Individual Decision-Making Approach to Bidding in First-Price and All-Pay Auctions

Abstract

We propose a novel approach to the modelling of behavior in first-price and all-pay auctions that builds on the use of a heuristic to achieve an Impulse Balance Equilibrium. The resulting individual decision-making model, nIBE, assumes no expected profit-maximization and accommodates any distribution of private values. Its parameter-free variant entails the Symmetric Bayes Nash Equilibrium bidding strategy for risk neutral bidders. Assuming impulse weighting may lead to under- or overbidding and organizes the effect of end-of-round information feedback on behavior. We assess nIBE’s explanatory power with experimental data and find that it usually outperforms the available regret models of bidding in first-price and all-pay auctions.

Keywords: first-price auctions, all-pay auctions, independent private values, heuristic behavior, Impulse Balance Equilibrium, anticipated regret, Symmetric Bayes-Nash Equilibrium, revenue equivalence, overbidding, information-feedback, experiments

JEL Classification: C91, D03, D4, D44, D81