Dutch vs. first-price auctions with expectations-based loss-averse bidders (Q2095269)

In this paper, the authors provide a novel explanation for the strategic (and hence, revenue) nonequivalence between the first-price auctions (FPA) and the Dutch auction based on reference-dependent preferences and loss aversion and show that loss-averse bidders bid more aggressively in the Dutch auction than in the FPA. It is shown that the symmetric preferred personal equilibrium (PPE) bidding strategy in the Dutch auction is given by \[ \beta_{DA}(\theta)= \int_{\underline \theta}^{\theta} \frac{1+\eta^g\lambda^g}{F_1(\theta)(1+\eta^m\lambda^m)}\left [\frac{F_1(\theta)}{F_1(x)}\right ]^{\frac{\eta^m(\lambda^m-1)}{1+\eta^m\lambda^m}}xf_1(x)dx. \] The basic result is contained in Proposition 4: In the Dutch auction there exists a cut-off type \(\theta^{\ast}\in (\underline \theta,\overline \theta)\) such that all types \(\theta < \theta^{\ast}\) would ex-ante increase their utility by deviating to a lower bidding strategy. Section 5 concludes the paper by discussing some implications of authors results.