Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/190571
Authors: 
Gretschko, Vitali
Mass, Helene
Year of Publication: 
2018
Series/Report no.: 
ZEW Discussion Papers No. 18-056
Abstract: 
Bidding in first-price auctions crucially depends on the beliefs of the bidders about their competitors' willingness to pay. We analyze bidding behavior in a first-price auction in which the knowledge of the bidders about the distribution of their competitors' valuations is restricted to the support and the mean. To model this situation, we assume that under such uncertainty a bidder will expect to face the distribution of valuations that minimizes her expected utility, given her bid is an optimal reaction to the bids of her competitors induced by this distribution. This introduces a novel way to endogenize beliefs in games of incomplete information. We find that for a bidder with a given valuation her worst-case belief just puts sufficient probability weight on lower valuations of her competitors to induce a high bid. At the same time the worst-case belief puts as much as possible probability weight on the same valuation in order to minimize the bidder's winning probability. This implies that even though the worst-case beliefs are type dependent in a non-monotonic way, an efficient equilibrium of the first-price auction exists.
Subjects: 
auctions
mechanism design
beliefs
uncertainty
JEL: 
D44
D81
D82
Document Type: 
Working Paper

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