• Open Access

First-price auctions, Dutch auctions, and buy-it-now prices with Allais paradox bidders

Authors

  • Daisuke Nakajima

    1. Department of Economics, University of Michigan; ndaisuke@umich.edu
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    • I especially would like to thank Dilip Abreu for his advice and encouragement. I am also grateful to Kenichi Amaya, Marco Battaglini, Tilman Borgers, Kirk Doran, Jeffery Ely, Faruk Gul, Tanjim Hosain, Michihiro Kandori, Eric Maskin, Chun-Hui Miao, Shantanu Mukherjee, Naoko Nishimura, Emre Ozdenoren, Thomas Palfrey, Wolfgang Pesendorfer, Larry Samuelson, Tadashi Sekiguchi, Lones Smith, Gabor Virag, and three anonymous referees for their comments and suggestions.


Abstract

This paper investigates first-price and Dutch auctions when bidders have preferences exhibiting the Allais paradox. We characterize an equilibrium for both auctions, paying particular attention to the dynamic inconsistency problems that can arise with such preferences. We show that the Dutch auction systematically yields a higher revenue than the first-price auction. This stands in sharp contrast to the presumption that these auctions are strategically equivalent, which is indeed valid in the expected utility case. We also show that introducing a “buy-it-now price” to the first-price auction increases seller's expected revenue when bidders have Allais paradox preference, while it does not for expected-utility maximizers.

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